THURSDAY OCTOBER 22, 2009

I'm Confused (again!)

I find it terribly scary that the United States has a governmental position called "Master for Compensation."  Kenneth Feinberg, the Treasury Department's  "Pay Czar." , has made news by declaring that executives at TARP banks will have their compensation cut by 90%!  On one hand, when you have the government as a partner, you should expect the government to make the rules.  So, maybe no tears should be shed for these execs.  On the other hand, Mr. Feinberg's ruling appears to be arbitrary.  Not all executives perform the same job.  Executives that run profitable business units at troubled banks, say Andrew Hall at Citigroup's Philbro unit, are assets to their firm.  Failing to pay them a market based compensation will only create incentives to migrate to firms not under the government's control.  I fail to see how this would " protect" the taxpayer.  The net impact is a brain drain.  Just note how Citigroup eliminated Mr. Hall's compensation headache by selling his Philbro unit to Occidental Petroleum.  Unfortunately, Citigroup losses the $2 billion in profits at a time it sorely needs profits.

Compensation aside, I am confused by the government's policy.  The government seems to be upset that many Wall Street firms have returned to profitability and are preparing to pay out bonuses.  Call me crazy, isn't that a good thing?  Keep in mind, firms such as JP Morgan and Goldman Sachs have made most of their new found profits through their proprietary trading desks.  Yes, those high flying, risk taking trading desks!  Importantly, these trading desks, and their handsome trading profits, are being subsidized by, you guessed it, the government.  The Federal Reserve continues to maintain interest rates at near 0.00%.  The FDIC has guaranteed bonds issued by these companies.  Now, after the companies have taken these subsidies and made profits out of them, the government is concerned about compensation based on these profits?

I have an idea...maybe the government should just eliminate the subsidies?  Profits would go down and there would be no need for "excessive" bonuses.  Would that be a good thing?  I'm confused.

POSTED AT 1899-12-30 14:31:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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