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.
OK, he meant the end of our economic problems. But it was a peculiar choice of words for a man who is supposed to be so eloquent. It s easily misunderstood especially since every single effort he, his administration, and Congress have put forth to stabilize the economy has done nothing but drive the stock market lower and lower.
I wrote here several weeks ago that the stimulus bill would be an expensive dud nothing but a big-government power-grab. And I wrote last week about what a disaster the unveiling of Treasury Secretary Timothy Geithner's half-baked bank rescue plan was. It's now gotten even worse, now that we can see a deadly surprises hidden in the "stimulus" bill, and now that we've heard the administration's plans for mortgage foreclosure relief.
No wonder my CNBC colleague Rick Santelli went a little bit berserk in his broadcast Thursday morning from the floor of the Chicago Mercantile Exchange, warning that all the bailouts, programs, rescues, stabilizations and stimuli are turning our capitalist nation into Cuba. He got the floor traders so stirred up it seemed for a minute there that an armed revolution was going to start at any moment.
Santelli is right. This country is being rescued to death. The voters may be fooled, for a while at least. But obviously investors have it all figured out.
Consider a little time bomb planted at the last moment in the stimulus bill. It wasn't hard to smuggle it on board: In total the bill was 1,071 pages, published as two enormous documents on the web site of the House Rules Committee late last Thursday night. It was voted into law on Friday, first by the House and then by the Senate, and it's virtually inconceivable that a single congressman or senator actually read the entire thing before he voted.
Especially the final 12 pages. Those pages the very last ones anyone would read before voting had even less to do with stimulus than the rest of the bill. That's were a law known as Title VII was strategically placed a law that drastically curtails the compensation of employees of most of America's major banks and brokerage firms.
If you're like a lot of people, you're outraged that a few bank CEOs are taking huge bonuses at a time when their own past mistakes had driven their firms to beg for government rescues. Fair enough. But Title VII goes way beyond that. It's aimed at anyone in these firms who makes big money makes no difference whether you were a bad guy who didn't deserve a bonus, or a good guy who did. Either way, you're screwed.
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.