TPM Reader AN wonders who’s interests are being served …
As I am sure you’ve seen, there have been a lot of recent reports of TARP funds recipients basically just itching to return the funds so they could get the federal government off their backs.Â Goldman Sachs is the most recent example and it appears their new brilliant plan is to raise half the funds they would need to repay the TARP funds by raising new capital.Â Former Treasury Secretary, Paul O’Neill, had an excellent response to this:Â “If banks now claim they want to return the money because they don’t need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?”Â
There is one aspect of this that I haven’t really heard people talkabout but think is really important and that’s the moral hazard issue that’s floating around in the background.Â It seems that the banks’ big problem with the conditions placed on TARP fund recipients has a lot (although not exclusively) to do with the limits on executive compensation.Â Now, at some level I can understand these CEOs being annoyed about having their and their subordinates’ compensation significantly limited–especially in the cases of those that came in to clean up messes they inherited (although I really don’t think any of them really have clean hands in all this).Â But the problem is they have a specific fiduciary duty to act not in their own best interest but in the best interest of their company’s shareholders.Â And when looked at through that prism its hard not to conclude that these CEOs are putting their own self-interest ahead of their company’s shareholders.Â Â Even if Wachovia and Goldman Sachs can afford to pay back the TARP funds right now, what’s to say economic conditions won’t worsen to the point where that money would have come in handy in navigating difficult times? Shouldn’t these companies be holding onto this money until the economic environment improves enough for them to be confident that they can repay the funds and still have enough money left over to meet their company’s needs?Â
This is where much of the root problem lays.Â I get the sense that a lot of these guys came of age at a time when the big investment banks were privately owned and hence a time where senior executives’ interests were closely aligned to their company’s interest.Â But now they have a bunch of sucker stockholders they can dump a lot of the risk onto (all while keeping windfall profits in the form of bonuses and golden parachutes).Â I am frankly surprised that a lot of the larger institutional investors that own bank stocks haven’t stepped forward to demand that these CEOs focus less on their compensation and more on their bank’s overall health.