This post is by MSN Money columnist Michael Brush:
Earlier this week House leaders boasted that they added tough measures to the latest version of the financial rescue plan to crack down on excessive pay for executives.
But once again, it looks more like a public relations blitz designed to please the constituents back home rather than a real reform that would have a true impact.
Let’s take two of the provisions that got talked up the most: a 20% tax on golden parachutes for execs at any banks that get bailed out and the elimination of corporate tax deductions on executive base pay over $500,000 a year.
That sounds great. But it’s pretty much worthless because banks can still do what they have always done here. They can still pick up the tab on that extra 20% tax on golden parachutes. And they can still simply choose to take the hit on the taxes on base pay over $500,000.
Banks -- like many companies -- have routinely done both of these things for years. There’s no reason to think they wouldn’t continue to get around the so called “limits” in the latest bail out proposal which is likely to get voted on again later this week.
There are other serious shortcomings with measures designed to supposedly cap executive pay at banks getting bail outs, says Paul Hodgson, an executive comp expert at the Corporate Library. He sums up the problems in a report released Tuesday called “Executive Compensation Reform by the Back Door: Pay Provisions in the Bailout Plan.”
Lawmakers, for example, say measures in the bill would limit incentive pay that encourage excessive risk-taking, and even impose outright bans on golden parachutes.
While those provisions are in there, they would only apply to banks in which the government takes an equity stake. “As soon as the stake has been sold, these limits can safely be ignored,” says Hodgson.
Plus, there’s little or no definition of the type of "excessive risk" pay that would be limited, or the limits themselves, says Hodgson.
Another feature, a "claw back" provision forcing executives to cough up incentive pay earned when accounting fraud puffed up earnings, are already covered in the Sarbanes Oxley Act.
What’s worse, lawmakers caved in to opposition to the pay crack down, in two key ways.
Earlier working versions of the House bill give shareholders access to the corporate proxy machinery. That would have made it a lot cheaper for them to run their own candidates for board seats -- candidates who might be better watchdogs over executive pay. That’s now gone. So is a provision that would have given shareholders "say on pay" votes at banks getting bail outs.
The pity here is that by removing these provisions, lawmakers took away two measures that might have started to get at the root issue here: Executives at banks had perverse pay incentives that encouraged them to pump up earnings by doing risky things like writing too many subprime mortgages, or owning debt instruments backed by those risky mortgages.
"There should be no doubt that executive compensation lies at the root of the current financial crisis," says Hodgson. But by taking out these two measures, the House has removed the teeth from pay reform in the bail out bill and replaced them with "a set of very ill-fitting dentures."
Apple shares are looking better after a miserable day yesterday, when the biggest selloff in eight years triggered a 17% price drop and slashed $20 billion from the company's market cap. Today, shares are up 7% to $112.60.
And Google is on the mend as well after closing below $400 for the first time in two years. Shares of the search giant have climbed 8% to $412.95.
That's not to say concerns about spending on technology have disappeared. Even Microsoft CEO Steve Ballmer said today that the global financial crisis we're in will impact all companies, including his own. "No company is immune to these issues," he said.
Microsoft shares fell about 9% yesterday but today are up nearly 5% to $26.21.
Tech stocks have always been high-risk, high-reward plays, but in this economy, the risk factor is just too high for many.
"Investors are no longer selling their losers in tech, but have turned to selling stocks that still have meat on the bone," said S&P analyst Scott Kessler.
Other analysts said it's just easier to sell tech stocks than other stocks right now. They are among the most liquid to trade, according to Reuters.
And in the end, big tech companies have a lot of cash in the bank and very little debt, and are prepared to survive the crisis, said analyst Jeffrey Lindsay at Sanford Bernstein.
"The cockroaches of this particular nuclear winter -- if
this is one -- will be Internet stocks," he said.
Campbell Soup Company, the world's largest soup producer, was the only stock in the S&P 500 index that finished higher in Monday's market massacre.
"If you have no confidence in your banking system and no confidence in the financial markets," said Tom Sowanick, chief investment strategist of Clearbrook Financial in Princeton, N.J., "the only thing you can have confidence in is the ability to build a bunker." Filled, apparently, with cans of chicken noodle.
Households continue to trim their budgets by switching to store brands, reducing restaurant visits, cutting back on bottled water, getting rid of the SUV, and reeling in that daily Starbucks habit. American families are rediscovering the value of soup and halting a long-term sales decline in Campbell's traditional condensed products.
Investors hope this will be enough to improve on a disappointing 1% growth in U.S. soup sales last year. Assuming the difficult economic environment continues, this is more than likely. After all, Campbell has an 80% share of the condensed soup market.
A new marketing campaign is in the works to take advantage of the situation. During a recent conference call, CEO Douglas Conant noted that "we clearly recognize there's a value proposition there and we're going to exploit it." Steps being taken include better separation of more expensive ready-to-serve soups from the condensed items in supermarket aisles, offering pricing promotions, and teaming with Kraft to offer cheap meal recipes such as grilled-cheese sandwiches and tomato soup.
From a profitability standpoint, Campbell enjoys much higher margins on its condensed soups compared to its fancier Select Harvest and recently launched V8-brand pureed soups. Still, rising costs for inputs like tomato paste and beef are a concern, forcing the company to announce a 4% price increase a few weeks ago. This comes on top of a previous round of price increases taken back in February.
Management is looking for 2009 earnings per share growth to come in between 5% and 7%, for a result of $2.19 to $2.24. Besides heavy spending on marketing here at home, the company is looking to expand into Russia and China where only 3% of the soup market is commercialized.
Image credit: Wikimedia Commons
(Disclosure: I don’t control a position in any of the companies mentioned)
Related reading:
Why egg prices are a shell game
Pinching pennies: Consumers switch brands
Sign of the times: Restaurants going bankrupt
Congress wants to crack down on CEO mega-salaries for banks participating in the bailout. And while the politicians argue how best to do that, Alan Fishman of Washington Mutual is headed for the doors with $19 million in his pocket.
If that wasn't outrageous enough, consider this: Fishman started the job three weeks ago. I never saw the employment ad Fishman answered, but it must have read something like this:
WANTED: Top executive for train-wreck bank about to be seized by federal regulators. Must be able to look busy while FDIC sells business from under you. Previous experience with angry shareholders sitting on worthless stock a plus. Perks: $7.5 million hiring bonus and $11.6 million cash severance.
Fishman got the best temp gig in history. He gets to keep the bonus and severance pay, though he must stay on the job while JPMorgan Chase completes its purchse of WaMu's banking assets.
To be fair, Fishman wasn't the one that took WaMu down a path lined with toxic mortgages and other bad assets. No, that role belonged to former CEO Kerry Killinger, who received $54 million over five years before leaving earlier this month. He's eligible for around $20 million in severance pay.
Other execs are also cashing in big. President Stephen Rotella gets $12.7 million in cash if he's terminated or quits with "good reason," according to the Portland Business Journal. And CFO Thomas Casey would get a cash severance of $6.3 million.
And WaMu shareholders got huge payments of...oh, wait. The stock is worthless. Shareholders got wiped out.
Related reading:
As banks broke down, CEOs cashed in
Bailout, shmailout. Executive pay still safe
CEO pay crackdown is toothless
Up until recently, the Fed had a good reason not to cut interest rates. Inflation might catch hold of the economy and undercut the purchasing power of individuals and corporations alike.
Inflation does not look like much of a leviathan any more. Oil has dropped from $147 to $94 in a very brief time. Agricultural commodity prices are dropping almost as fast. The money that the Fed has pushed through its emergency lending window, now well into the hundreds of billion of dollars, has done nothing beyond strengthen bank reserves. Not a trace of it has shown up in the lending markets.
The prevailing wisdom is that Congress will eventually come up with a bailout package for financial institutions and mortgage-holders. That was the prevailing wisdom yesterday and it turned out badly. Counting on a legislature where every representative is up for re-election is worse than betting on a game of Three-card Monte on a New York City street corner. It is all risk and no reward.
The largest single advantage that the Fed has in a financial crisis is that it can act alone. It operates without permission and only the most modest regulation.
Cutting rates to zero will certainly not cost the government and taxpayers $700 billion. It might well free up some of the credit which is currently frozen in place. It would certainly tranquilize some of the market's hysteria. It would leave the impression that there is some will to power left in the institutions put in place to keep the financial world orderly.
Purists would argue that it is not the Fed's job to exercise broad powers. It should have as its sole focus issues of inflation and deflation. It should never be an activist agency. That is the province of the portion of government run by elected officials.Precedent would argue in that direction.
Since the dike of government protections has been ruptured, precedent may have lost a great deal of its charm. There are no institutions left which can take immediate and direct action, with the exception of the Fed.
Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.
Related articles:
Hedge funds may need government loans
Small business borrowing has been crushed
