Obama’s $500,000 Cap Feels Great, Does Nothing: Graef Crystal - Graef Crystal - 9 Feb 2009

Obama’s $500,000 Cap Feels Great, Does Nothing: Graef Crystal

Commentary by Graef Crystal

Feb. 9 (Bloomberg) -- I’m in a time warp. I keep hearing
Howard Beale from the movie “Network” screaming, “I’m mad as
hell, and I’m not going to take it any more.” Yet when I open my
eyes, I find myself looking not at Beale but at President Barack
Obama.

Our new president has worked himself into a lather over the
way senior executives have been paid at major financial
institutions, particularly those that have received gargantuan
government assistance.

Last week the Obama administration issued new regulations
designed to curb executive pay while at the same time avoiding
unnecessarily risky incentives.

Bottom line: The new rules do neither.

The regulations distinguish between gargantuan borrowers
such as American International Group Inc., Bank of America Corp.
and Citigroup Inc. and lesser debtors.

Senior executives at the big institutions (probably the top
five who appear on proxy statements) can’t receive annual
compensation (probably salary and bonus) of more than $500,000 a
year.

By itself, that’s tough. So tough that my first impulse was
to figure out a way to short the New York City real estate market
-- and the Hamptons while I was at it.

“But wait,” as the gadget hawkers say on TV commercials.
Those senior executives can receive as much restricted stock --
free shares -- as their boards want to give them.

Doughnut Diet

This is akin to admonishing a teenager that he has to lose
weight and therefore can no longer buy Big Macs and fries, only
to turn a blind eye as he consumes endless amounts of pizza and
donuts.

So I may have to limit your cash pay at $500,000, but I can
give you $100 million of free shares.

“But wait.” Those free shares come with a catch. The
government has to be paid back before they vest, something that
may not occur for years or may never occur.

“But wait.” There’s an escape clause buried in the new
regulation. The shares can be allowed to vest “after a specified
period according to conditions that consider among other factors
the degree a company has satisfied repayment obligations,
protected taxpayer interests or met lending and stability
standards.” Whatever that means.

Then we have an “earmark” in the regulations, one
sponsored by some in the corporate-governance priesthood. It’s a
requirement that a company allow shareholders a “say on pay.”
The priesthood figures that if shareholders can express their
opinion on the subject, boards will pay attention.

No Limits

But these resolutions are non-binding. Lawyers call this
arrangement “precatory,” after the Latin word for prayer. You
can pray to the Lord, but He might not hear you. In this case,
you can pray to your board, and if past behavior is any guide, it
definitely won’t hear you.

Then, for companies receiving financial assistance from the
government, other than the really big borrowers, there is no
limit of $500,000 in cash and, indeed, no limits at all, provided
you disclose everything and the shareholders get their

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