The Obama administration is going to need to bite the bullet and come clean with the American people. It has to tell them the truth about the bailout programs. Specifically…
…officials at the Treasury and the Fed said they worry harsh pay limits will undermine critical bailout programs by discouraging financial firms from participating. Although many of these companies could survive without government help, they might lack money to ramp up lending, which officials consider critical to turning the economy around.
Some banks could not survive without government help, but we haven’t defined who they are yet. Hopefully, the stress-tests that the Treasury Department is performing on financial institutions will help clarify the situation, but we can’t be setting executive pay restrictions based on mere participation in the government recovery programs. We are asking banks to take low-interest loans so that they can increase their capitalization and increase lending. It’s perfectly acceptable to make demands about how that money is utilized (for lending) but we can’t treat every firm that accepts the offer as if they’re now government property and set all kinds of restrictions on how they run their businesses. If we do, then the plan won’t work.
At the same time, the Obama administration cannot hope to get away with skirting the laws that Congress laws down, no matter how misguided they may be. Even if their efforts are ultimately determined to be constitutional, the political costs are too high. The problem is a matter of perception. The public thinks the money is going to banks to keep them from going bankrupt and therefore has certain expectations about how firms that accept the money will behave. But only a small percentage of the banks are actually facing insolvency, and we don’t have any clean way right now of legally distinguishing between the two.
What we need to do is decouple these issues. Executive pay should be regulated by law, irrespective of which firms are participating in government recovery efforts. As soon as possible, firms that are insolvent should be identified and treated differently under the law from banks that are not. We should not be buying equity stakes in solvent institutions that we believe will have no difficulty in repaying our loans. We should be taking equity stakes only in truly insolvent institutions.
This is a political matter. And the Obama administration needs to treat it as a political timebomb. Sort things out quickly, because the status quo is too ambiguous and too subject to easy distortion. The plan to increase lending is solid, but the means is unsustainable.
