The Beginning of the End for Investing?

With the Dow Jones Industrial Average making new lows, President Obama may have it exactly right. When he signed the so-called “stimulus” legislation on Tuesday, he said, “today does mark the beginning of the end.”

Just how do we expect any talented person to work like a dog to put our banks back together if we don't pay him?

Here's how Title VII works. Any bank that participates in any way in TARP is subject to the new law. The more TARP money you take, the more people in the company to whom the rules apply. For the biggest banks who took the most money, the rules apply to “senior executives” plus the 20 “most highly compensated” employees.

The rules prohibit any incentive compensation of any kind — bonus, commission, whatever — unless it is paid in restricted stock that doesn't vest until the TARP money is paid back to the government. And the amount of the restricted stock is limited to 50% of your salary. So if you make $200,000 a year, the most you can get in restricted stock is $100,000.

Typically, highly compensated people on Wall Street earn fairly low salaries, but then get large annual bonuses — usually based on performance. Title VII turns that upside down. No more pay for play. It's all about salary now. So if a bank normally pays a superstar trader a nominal salary of $200,000 — and in a home-run year he earns himself a $10 million bonus — the only way to pay him the same total amount is to raise his salary to about $6.6 million. He'd then get that salary even if he did a lousy job in a given year.

And can you imagine the howling from the Congress and the media if we paid huge salaries to these people? There'd really be no choice but to drastically cut back their total compensation.

Who cares, perhaps you are wondering, since at most it would affect 20 or so people. Who cares if they make a lot less money for a while? But stop and think. If the rule affects the top 20 people, then by definition it affects potentially thousands of others. Because if you lower the compensation of the top 20, then they're not the top 20 anymore. So you then have to lower the next 20 — and so on, and so on, and so on — until just about everyone is making the same thing. Nothing.

And I haven't even told you the worst part: Title VII applies retroactively to every bank that ever took any money at all from TARP, all the way back to last October — banks that had no idea this would be imposed on them. Most of these banks were healthy institutions, encouraged by the Treasury to take TARP money to stimulate the economy. Talk about no good deed going unpunished.

And don't get me started on the foreclosure relief plan announced this week. On the face of it, it's nothing but a scheme to get responsible homeowners to pick up the tab for irresponsible ones. We can argue about whether that's a bitter pill worth swallowing under the circumstances. But let's not kid ourselves about what it is.

The worst part of it is Obama's intention to support an initiative in Congress to make mortgage debt subject to reduction in bankruptcy proceedings. Under law now, a home mortgage is a “secured obligation” in bankruptcy, which means a judge can't arbitrarily force a lender to take reduced payments or principle. But under proposed legislation, a judge could now “cram down” such reductions on the lender — even though every single mortgage in existence today was made on the assumption that such a thing could never happen.

How are we supposed to invest, to plan, to save, to build, to lend, to take risks — when at any moment the government can change the rules of the game? When, at any moment, the government can take the winner's winnings and give them to the loser?

No wonder stocks are making new lows. Rick Santelli is right. And Obama might be, too. It might be the beginning of the end.