Wednesday, October 21, 2009

Pay Czar Puts Down Foot, Sparks Sell-Off

Kenneth Feinberg, the Treasury Department's special master for compensation (aka "the pay czar") has used his new found powers to slash proposed compensation for the 25 highest-paid employees at the seven firms receiving extraordinary amounts of government aid. The firms include Bank of America, Citi, Chrysler, Chrysler Financial, GMAC, AIG, and GM. Mr. Feinberg will also demand a host of corporate-governance changes at those firms. He is set to lower total comp for 175 employees by a jaw-dropping average of 50%. The biggest cuts will be to salaries, which will drop 90% on average. Details are forthcoming but the person familiar with the matter who leaked the story to the press has revealed that no employee within the AIG Financial Products group will receive compensation of more than $200,000. Any ordinary American reading the news might shrug his shoulders and say "What's the big deal? That's still three times as much as I make." But the employees working for the unit are probably used to making much more and are currently in a state of shock. Will they all walk out on their jobs in protest? That's the interesting question. Will it matter one way or the other? Probably not. The government is not getting its money back on that turkey whether it pays top dollar for "talent" or not.

The market had an interesting response when the news hit the tape. All of the banks stocks sold off on the news. It is as if everyone panicked and said "Oh my God! All the talent is going to leave to start their own hedge funds because of the threat of comp getting slashed across the board." The funny thing is if all of the bank stocks actually slashed their comp expenses by 50%, that would be a huge boost for shareholders. Bank stocks should've rallied on the news. Goldman has set aside over $16 billion for compensation this year. Cut that down to $8 billion and the firm just made another $8 billion in profits, which is equal to more than the past two "record" quarters of earnings. Oh but right, if you cut comp by 50%, all the talent is going to scurry away and the firm will be left with a bunch of monkeys that buy MBS from Fannie and Freddie, finance them at zero percent interest rates and then mark 'em up and sell them to the Fed. And we can't have monkeys doing that kind of rocket science unless we pay them $700k a year. No, the smart folks will go to greener pastures at, I don't know, Citi? AIG Financial Products? Galleon?

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