Populist Foolishness

Companies that have received government bailouts have become the favourite whipping posts of politicians.  The auto companies and major banks have been subject to restrictions on executive compensation to widespread cheers from the proletariet masses.

These moves appeal to the common folk who are angry that taxpayer funds were needed to prevent these private companies from going under and creating havoc.  However such measures were always wrong on the merits.

In recent days it has come to light that companies such as Royal Bank of Scotland (RBS) have suffered the loss of over 1,000 top producers due to restrictions on compensation.  They have opted to leave for companies that did not take government bailouts and hence were not subject to restrictions on pay.  General Motors fired Rick Wagoner and now have fired Fritz Henderson.  What quality CEO will they find when they are subject to pay restrictions?  Lee Iacocca was headhunted into Chrysler in the late 70's and turned that company around (also with government loan guarantees which were repaid early and in full).  Would such a top executive take the helm of GM or Citibank when he knows that his pay could be multiples higher if he/she chose to work at another company? 

Citibank is in negotiations to pay back TARP money so that they will not be subject to restrictions on compensation. Citibank has been the subject of poaching raids by other financial institutions who target their top talent with bonuses that a TARP restricted firm cannot pay.

Lost in all of the class warfare inspired outrage is an important point:  the individuals that lost so much money and endangered their firms were all fired.  The comp restrictions are targetting people who made money without taking such silly risks. 

Lost also is the fact that the government bailouts were largely in the form of a purchase of a part of the company by the government.  RBS is 80% owned by the British government and Citi is 30% owned by the US Treasury.  They will recoup their taxpayer funded investments most effectively by keeping top producers on the payroll...not by driving them away!

Perhaps the most singularly stupid move comes from Chancellor of the Exchequer Alistair Darling who is preparing to introduce a bonus tax on bankers.  Perhaps Mr Darling is not aware but Britain is not a particularly big place.  The money that is earned by British banks and used to pay bonuses aren't necessarily British sourced money.  The introduction of such a tax will prompt banks to flee Canary Wharf and set up shop in other countries where they can do the same business.  In short, it will result in less money for British coffers and fewer jobs in Britain.

Some have even raised the possibility of a human rights complaint to the ECHR as it is unprecedented for a tax to be levied on a particular profession only.  However there is an election coming up in Britain so i don't expect such stupidity to fall by the wayside.  British citizens will comfort themselves in the knowledge that a banker earning 2 million pounds a year will pay more taxes than a soccer player earning 10 million pounds.

Apologies for the rambling nature of this post but I feel that i am still more coherent than the poorly thought out policies being made by elected officials.