Does Anyone Really Think This is a Good Idea?

During my daily reading of the Drudge Report, I ran across the following article published in the Wall Street Journal:

U.S. Eyes Bank Pay Overhaul

But it was the subtitle that really caught my attention:

"Administration in Early Talks on Ways to Curb Compensation Across Finance"

The Obama administration is proposing the regulation of compensation at all financial institutions even if those institutions did not accept bailout funds. WHAT!?! If that didn't make your jaw drop, read it again and let it soak in.

The administration's so-called "authority" for the ability to do this is that the Federal Reserve and SEC have the power to supervise financial institutions and that these supervisory powers would allow them to "curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank." Obama and Geithner are using public outrage over bonus payments at financial institutions to nationalize the financial system!

Let's take a look at one of the biggest culprits--AIG. AIG got in big trouble with credit default swaps. A credit default swap is an insurance policy protecting against a borrower defaulting on his/her loan. At the time AIG received it's $170 billion bailout from the federal government, it had $372.3 billion in exposure from its risky investment. The only way it would have to pay that is if every single borrower covered by these swaps defaulted on their loan obligations. Regardless, that is a huge amount of liability exposure by any standard. For more in depth reading about what exactly was going on with AIG, click here.

AIG is a very large company. If you take a look at its balance sheet for 2008, it had total equity (assets - liabilities) of $52.71 billion. Of course, that number is a joke because the administration decided to get rid of the mark to market accounting rules which allows companies like AIG to give value to their subprime "assets" when everyone knows they have no market, and thus, no value.

But, back to my point. Obama and Geithner are seizing on the public outrage over AIG paying out $165 million in retention payments (which the media falsely brainwashed people into believing were bonuses. See my earlier post on this issue.) in order to try to take over the financial system. Does anyone really believe that AIG's payment of $165 million in executive compensation is what made the company less "safe and sound"? In light of the $372 billion debt exposure, I don't think it's the $165 million in compensation payments that has the company in deep doo-doo.

So, here's what's going to happen. If the government regulates how much financial institutions can pay its employees (this is communism in case anyone was wondering), the true talent will not work at those institutions. They'll go wherever they can to make as much money as they can. In the absence of talent, the government will fill those positions with its own picks and thereby have complete control over the institutions. It's already happening in the auto industry.

In our once free-market society, there were three distinct groups of people who controlled how businesses were run. First is the consumer--you and me. If we don't like a particular company's product, we don't buy it. The second group of people, the company's board of directors, is tasked with the responsibility of hiring people and making corporate decisions that convince the consumer that the company has a product worth buying. If the board of directors fails at that task, the third group of people--the stock holders...also known as the OWNERS--vote to fire the board members and replace them with people who can do the job. There is no room for, nor need for government intervention. Markets always work themselves out.

So far Obama has taken over the auto industry and is well on his way to taking over the financial industry. What's next?