Monday, March 23, 2009

Administration Seeks Increase in Oversight of Executive Pay -

Everyone knew more regulations would be coming, and here is a sneak peek from the NY Times

Administration Seeks Increase in Oversight of Executive Pay -
"It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules."
Good idea. Transparency is good and if a market can be developed for these securities, the marking to market problem is largely reduced. However, it is a big IF.

and later:
"The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation."
Red Flag thrown (note the red flag here is a US football analogy and was not originally intended to have any bull fighting reference. That said, as Monk just pointed out, maybe it would have been more appropriate on two levels.). It seems that further review is called for here. Transparency is good. For regulators and companies. Why not allow it to be debated publicly?

And the later:

"One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. "

Ignoring for a second the SEC's past failures with respect to executive pay and again stressing that transparency is good, it is difficult to swallow mandates telling shareholders what they have to do. For instance, I do not understand requiring pay to be tied to performance. If shareholders want to give a straight salary they should be allowed to do so. If a manager does a great job and yet the economy is bad so that the stock falls anyways (but not as far as it otherwise would have), that manager should be rewarded. This is a can of worms that I do not think I want government regulators dictating.

and later still :
"Administration officials are also debating how tightly to supervise hedge funds. A broad consensus has emerged among regulators and administration officials that hedge funds must be registered and more closely monitored...But officials have not decided how much the funds will have to disclose about their investments and trading practices. The officials spoke on condition of anonymity because the regulatory plan was still being formulated...."
Notice also the article is no longer questioning if hedge funds will have to disclose their investments and trading practices but "how much" they will have to do so. While knowing the risks is important, for hedge funds their trading practices are their trade secrets. Disclosing these is somewhat the equivalent of ending patents.

Somewhere I fear Atlas just shrugged.

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