The Right Strings

While I’m still fence-sitting on the proposed bailout plan, I have come up with a partial opinion, on one of the proposed aspects being kicked around for it. The Democrats want to tie a cap on CEO pay for any company that signs up for the plan.

Now, I happen to think that there should be some conditions for the bailout, and I have no problems if they pinch a bit, but that strikes me as just plain stupid. Imagine the following Bob Newhart-esque phone conversation:

“Hello, Mr. Miracle Worker CEO. This is Gerry, down at MegaDumb Bank. How are you doing today? …That’s great… hey, you might have heard about us lately… yes, that was us… yeah, that was us, too… yeah, we did that… that, too… so, it seems you have heard about our problems… yup, that was us too… so, Mr. Worker — can I call you Miracle? OK, Mr. Worker, here’s why I called. We just got rid of our old CEO, the guy who ran us into the ground, and we’re wondering if you’d be interested in the job… yes, sir, we heard you love a good challenge… yes, sir, pretty much absolute authority… three-year contract? no problem… yes, you can bring some of your own people, too… salary? Funny you should bring that up… you see, Mr. Worker, under the terms of the federal bailout, you’d have to take a 90% pay cut… um, no, sir, that’s not a joke… really, sir, I’m not kidding… sir, I’m nowhere near your leg… please, sir, try to stop laughing before you pass out… sir? …sir? Mr. Worker? I’m going to hang up now and call 911 for you…”

As I said, I don’t have a problem with strings. But this is typical Democratic crap — a blunt club of a punitive measure. It’s putting the government in the position of micromanaging these businesses, and if there’s anyone more inept than the current crop of bozos we have in our financial sector, it’s the federal government. So just say no to CEO pay caps and other similar measures.

But let’s not let them off the hook entirely. Instead, let’s literally make them pay for the privilege of dumping their bad loans on the taxpayer. I had an idea for a formula:

If an institution wants to sell its bad loans to the government, we take the total they want to unload and calculate how much of a percentage of their total such loans they hold. Suppose the MegaDumb Bank I mentioned above has two billion dollars in loans they want to dump, out of a total of ten billion dollars. That’s 20%. (Yes, I’m making up numbers to keep the math simple.)

Whatever the percentage works out to be, divide that by 4. In MegaDumb’s case, that works out to 5%. So MegaDumb, for the privilege of unloading those bad loans, has to pay the government 5% of its gross revenues as a “bailout tax” for as long as the government holds those bad loans.

Now, the bailed-out companies will have the right to buy back those loans at any time, immediately ending their obligation to pay the bailout tax. Likewise, should the government manage to find someone else to buy off MegaDumb’s bad loans, that would end the obligation. If that happens, the government will look at what it paid for the loans versus what it sold them for. If the government lost money, then MegaDumb will be on the hook for the “bailout tax” until that difference has been made up. (No screwing around with interest, COLAs, or anything — a straight-up comparison of what the government paid versus what the new buyer paid.) If the government sells the loans for less than they paid, then MegaDumb is off the hook for future bailout tax payments, but the government pockets the difference as its reward to the taxpayers.

Yeah, it sounds a bit complicated, but it does what I think needs to be done — it gives the bailed-out businesses some hefty reasons to debate whether or not they really need the bailout, as it’ll put them on the hook for the foreseeable future. But that hook will not be a simple punishment, but an incentive to get their asses in gear and their houses in order.

As I said, I dunno if I’m in favor of the bialout generally. But I do hope that if it does go through, someone will apply a smidgen of common sense (a rare commodity in DC, we’ve all noted) and use the clout it will give the government not to indulge their petty cravings for punishment, but for actually trying to fix the problem. And I’m just naive enough to think that my “bailout tax” plan could do just that.

The Knuckleheads of the Day award
Palin, Biden and the Importance of a Firm Base