President Obama is now going to propose to regulate the salaries of all executives at banks and financial firms. This includes companies that have not taken any TARP funds, and companies that were responsible during this financial crisis and some that are even profitable.
This is liberal overreach at its worst. The Obama Administration is floundering and out of control.
The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. Beyond the pay rules, officials said the regulatory plan is expected to call for a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.
Officials are now debating at how broad the regulations should be, and whether they can enforce this by executive order instead of by the legislative process. Democrats and Republicans have fierce lobby efforts from Wall Street, and getting this time of legislation through would be an enormous battle.
The financial companies are slowly fighting back, but they have little leverage. The executives of JP Morgan, Citibank, and Bank of America all wrote letters to the President and Congress, trying to explain that limits on bonuses and pay will significantly limit their ability to hold valuable employees.
This is Sarbanes-Oxley all over again. Remember that? It was the bill, that in Congressional period of angst after the Enron mess, was quickly passed to supposedly raise ethical standards for public companies. But again, the law of unintended consequences.
A research study published by Joseph Piotroski of Stanford University and Suraj Srinivasan of Harvard Business School titled “Regulation and Bonding: Sarbanes Oxley Act and the Flow of International Listings” in the Journal of Accounting Research in 2008 found that following the act’s passage, smaller international companies were more likely to list in stock exchanges in the U.K. rather than U.S. stock exchanges. A December 21, 2008 Wall St. Journal editorial stated, “The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public.
Mr. Obama is flailing. He saw a crisis, and is having an uncontrolled reflex response with no rational idea of what the long term consequences of his actions are. There is no intellectual discussion occuring; it is all emotional response to immediate issues. The Obama Administration is considering making an already bad situation, amazingly enough, worse.