Tuesday Links: Pay Matters, Tablet Econ, Windfall Tax, TBTF

This is a must-read Financial Times column from a few days ago on why compensation really is an important issue and has been misplayed by parts of the media:

According to standard narrative, the meltdown of Bear Stearns and Lehman Broth ers largely wiped out the wealth of their top executives. Many - in the media, academia and the financial sector - have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. The narrative, however, turns out to be incorrect.

The executives pocketed huge cash bonuses of course, but they also cashed in tons of stock:

Furthermore, executives regularly took large amounts of money off the table by unloading shares and options. Overall, in 2000-08 the top-five teams at Bear and Lehman cashed out close to $2bn in this way: about $1.1bn at Bear and $850m at Lehman. Indeed, the teams sold more shares during the years preceding the firms’ collapse than they held when the music stopped in 2008.

The authors conclude this provided bankers with perverse incentives to boost “improve short-term results even at the cost of an excessive rise in the risk of large losses at some (uncertain) point.”

Like us, Ken Doctor really liked the Sports Illustrated tablet demo, calling it an “ah-ha moment”:

We could see a different kind of news reading future, one that has long been promised, hinted at, drawn in pencil and on whiteboards for, it seems, like decades… Real reader choice and interactivity, and our ease ability to go deeper and broader, or pull back and just browse. Glorious, real-world color. Immersive advertising.

I share Doctor’s sense that tablets or advanced e-readers offer the press a chance (probably the last one) to sever the disastrous economics of the Web and start somewhat anew:

Web browsing — desktop and laptop — has been a quicksand for publishers. Alluring, it drew them in and then got them stuck. Maybe, they hope, this next generation of reading devices — tablets (and maybe mobile) can re-start the engines, putting them on the curve (if not ahead of it) with readers and advertisers, instead of being sent to the dustbin of history as dowdy, old, dying media.

We can only hope.

The New York Times’s DealBook runs a column calling for a windfall tax on Goldman Sachs (an Audit funder) this year, taking back the money earned from government support. It deserves quoting at length (though as David Reilly wrote the other day, it’s wrong to just focus on Goldman):

… make no doubt, for the time being a good measure of Goldman’s profits are derived from a benefit that Goldman and other financial institutions have obtained from the efforts of the federal government.

This benefit fits the circumstances for the imposition of a windfall tax. A windfall tax is best suited when the gain is unexpected, like winning the lottery. Taxing it is appropriate since the payees do not expect a windfall and so taxing the amount does not distort their future economic actions. This alone would justify a tax.

But there is another justified reason for a tax on Goldman Sachs. A portion of Goldman’s profits are really the government’s profits. Allowing Goldman to keep this money is simply allowing the investment bank to keep money earned from the efforts of the federal government

This column follows important ones in the Financial Times and Wall Street Journal calling for much the same thing.

— Simon Johnson at The Baseline Scenario eviscerates a Goldman Sachs executive’s case for keeping too-big-to-fail financial institutions. Here’s how he takes on one spurious argument:

Corrigan’s second claim, that breaking up banks would be hard to do, is based on assessing a “straw man” proposal – that the government dictate the microstructure of any bank downsizing. But no one serious has put forward such an idea.

A hard size cap for total assets would operate just as the hard cap (10%) on share of total retail deposits was envisaged by the Riegle-Neal Act. The bank itself is responsible for complying with this regulation, subject to supervision by the authorities.

If any bank complies with any regulation in a way that reduces shareholder value, its shareholders are going to be very upset. Goldman Sachs is filled to the brim with smart people; they can figure this out.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.