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EDITORIAL; Fomenting financial disasters

- The Washington Times - Monday, October 26, 2009

Kenneth R. Feinberg, the Obama administration's "pay czar," has no clue about how to run a business. And why would he? His professional background is not in business, but as a liberal trial lawyer. His career includes such relevant experience as placing valuations on the Kennedy assassination's Zapruder film and on the lives of those killed in the Sept. 11 terrorist attacks.

Nothing in his background seems to make him qualified to determine how much firms should compensate executives. But even an extensive business background wouldn't mean that he should set corporate salaries. He has no economic incentive to pick the right salaries. Perhaps he pays a price if the political consequences go south, but not if he simply damages the companies that have fallen under his thumb.

Corporations such as Bank of America Corp., who took government bailouts, find that their 25 best-paid executives are now going to be paid about a tenth of what their contracts promised and bonuses and retirement contributions will fall to about half. Incredibly, the Obama administration maintains that the pay czar made these decisions entirely on his own.

Legally, the pay czar is limited to determining what executives get paid starting in 2009, but he has found a nifty way around that legal obstacle. For Bank of America's chief executive, Kenneth Lewis, the pay czar simply ordered him to earn a negative salary this year. In other words, Mr. Lewis is paying for the privilege of working 70-hour weeks this year. Not too surprisingly, Mr. Lewis has chosen to leave the company very soon.

Proponents claim that cutting salaries will make executives work harder so that they will again be allowed to make more money in the future, government allowing, of course. A more likely outcome is that these executives will leave for greener pastures where the Obama administration does not hold sway.

Advocates further argue that since these firms took government bailouts, the government should have the right to determine corporate salaries. But many firms were forced to take bailouts from the federal government, so this makes little moral sense. Banks were brought to the Treasury Department and told that if they didn't agree to take the bailout money, the government would use banking regulations to destroy their companies. The government claimed that it was justified making these threats because if only some banks took the money, those particular banks would be stigmatized.

For Bank of America, the government's behavior was quite outrageous. The government asked Bank of America to buy Merrill Lynch & Co. Inc. But when Bank of America checked Merrill Lynch's books, they found that firm was actually in much worse shape than the government had originally told Bank of America. And we are not talking small changes, but billions and billions more in losses than the bank had been told about. When Bank of America's chairman and board wanted to inform shareholders that the deal was bad, Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke threatened to have the board members fired and replaced with people who would follow their orders.

Economists generally believe government regulations caused the financial problems in the first place. But that is ignored while President Obama and his minions demonize the financial sector and push for more regulations and a new regulatory agency.

Government micromanagement won't lead to economic growth or healthy businesses. When government starts setting wages and prices, it only leads to more economic problems.