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The Thinkers' Club Message Board › Finance and Politics

Finance and Politics

Amy
user 8342056
Twinsburg, OH
Post #: 8
Ok, so this may be off the topic of philosophy....or maybe not...but I'm kind of wondering what everyone out there thinks about the last administration and the current administration's treatment of the financial crisis at hand and the state of the economy. I hear that President Obama has proposed legislation that will cap senior finance executives' income to $500,000 per year. On the subject of financial inequality and the construction of equality, what do you all think about that move?
I understand the temptation to create a law to cap executives' income; afterall, we don't want all the bailout money (our tax dollars) being used to pad CEO's pockets. At the same time though, I know that my particular financial organization has not encountered any financial difficulty lately and has not accepted any money from the federal government. I know that we have jr. executives and managers earning over $500K in commissions and overrides; placing a cap on all finance exec's income might discourage managers in my organization from wanting to take the pay cut of moving into a senior executive role. If we haven't accepted any financial assistance from the government, why should the government have the right to cap our executive's income....Most people who work in the financial services industry get paid based on their production on a commission schedule; what they get paid is directly proportionate to what revenue they bring into the company. Thus, it's not as if my CEO's high salary is really depriving me of the right to make a decent income. Don't get me wrong; I'm all for regulating some things (like maybe requiring that mortgage brokers take some sort of licensing course and that financial companies institute full-disclosure policies)...I'm just not quite sure that the government telling me how much money I can and cannot make floats my boat. I realize that many CEOs are greedy and probably do get overpaid, but is it really the government's role to dictate payroll?
On the other hand, will this cap on payroll help to redistribute some of the wealth in this country? Will a cap on exec's income discourage companies from having to make higher and higher bids to compete among each other for qualified CEOs? Maybe this will allow financial organizations to use company money for the benefit of clients and other employees...right.
Another question I have for you all:

Maybe I have just been completely out of the loop, but is anyone talking about what happened to PMI (private mortgage insurance). Theoretically, isn't that supposed to protect the bank against the risk of foreclosure on high-risk borrowers? As more and more homeowners default, are the banks receiving their PMI payouts? I mean, shouldn't all those PMI payments be protecting the banks against this foreclosure crisis? Has anyone heard anything about this?


Brian
brian_t
Cuyahoga Falls, OH
Post #: 3
I heard a story about this on NPR yesterday. Apparently, it is only supposed to affect "senior executives", but since "thousands" of junior executives and below also make over 500k, it will doubtless affect them as well. It's not clear if Obama is restricting this rule to companies that get TARP funds, or if it will eventually be extended to every financial company - or even *any* company the government deems necessary. If the former, it might be tempting to just say, "well, that's what those companies get for begging for govt money", but don't forget that several companies were forced to take TARP funds.

What it comes down to, as always, is individual rights - the rights of employers and employees to choose the terms of their agreements. The employer has the right to offer whatever amount he wants in exchange for the employee's services, and the employee has the right to accept or reject that offer, or make a counter-offer. Either can accept or walk away at any time. What the new administration's plan does is violate those rights - as did the old administration's plan to "bailout" companies in the first place. At the root of it, all of these govt. economic planners are telling someone, somewhere, "you should not be allowed to decide the terms of your contract - we will decide them for you, and you must accept them."

I'm sure this plan will result in people leaving those companies in search of higher pay. Will it become a mass exodus? And what would the administration do, if anything, to stop such an exodus? Maybe they'll force people to stay at their existing jobs under the banner of "riding out the storm".


Regarding PMI: Apparently PMI only covers the down payment amount that the lender preferred to receive. So, for example, most lenders want at least 20% down payment, because people who pay less down are more likely to default. To get at that higher risk market, they use PMI to cover the difference between the down payment they would prefer and the actual down payment. So they offer a buyer 5% down payment with PMI to cover the other 15%. If the buyer can't, they get the rest of that down payment, and a house that's worth less than it was when the buyer bought it.
Amy
user 8342056
Twinsburg, OH
Post #: 9
To me it's just so funny. Its like a parent taking a kid's allowance away because he got too "greedy." And why is it that the government could impose a cap on salaries in the finance sector but not on other industries?? Why is the over-paid CEO in one industry less greedy than a CEO in another industry?? Why is that fair? This seems to be a huge violation of free enterprise and scares me....gosh, I was really looking forward to making over 500K a year. I guess I'll have to give up on my dream of being a philanthropist. I think that there should be a cap on income for politicians as well...or maybe just greater regulation of their transactions with the social security trust :).
As for PMI, I'm glad to have more information. My organization does not charge anyone PMI, but I do know that for some people it can be $300-$400 per month on top of their mortgage payment. I still have no pity for the banks; just don't lend to people who are too great of a risk and can't put enough money down. Duh. Even without the PMI payout, the bank still gets to resell the house in the event of a foreclosure. Appearently, the average HUD house is still worth 2/3 of its original cost.
Brian
brian_t
Cuyahoga Falls, OH
Post #: 4
And why is it that the government could impose a cap on salaries in the finance sector but not on other industries??

Because then they could never get away with it.


I still have no pity for the banks; just don't lend to people who are too great of a risk and can't put enough money down. Duh.

Yes, that should be obvious, but a few things clouded the minds of those banks' executives. The Federal Reserve artificially dropped interest rates below market level in the name of "affordable housing" (2001-2004), encouraging risky lending. They later inflated rates five-fold (2004-2005), leading people with adjustable-rate mortgages to default on their loans. In addition, the government-backed housing agencies Freddie Mac, Fannie Mae, and Ginnie Mae guaranteed these high-risk mortgages, turning toxic assets into securities that people throughout the market eagerly ate up. This problem could have remained isolated had those mortgages not been federally-guaranteed, allowing them to be labeled "securities".
A former member
Post #: 2
If we're really practicing "free enterprise", then sure, you should have no guilt earning gazillions if you can find a company willing to pay it.

And if your company fails, it should go bankrupt, stiff the creditors, customers, investors and employees, toss you out the door and resolve never to pay gazillions to idiots like yourself.

Wait, we can't allow that to happen? We have to bail out your company with taxpayers' money? Then you're working for us taxpayers now, and if $500K is all we give you, that's all you get.
Brian
brian_t
Cuyahoga Falls, OH
Post #: 5
Wait, we can't allow that to happen? We have to bail out your company with taxpayers' money? Then you're working for us taxpayers now, and if $500K is all we give you, that's all you get.

But what about companies that did not want a bailout, but were forced to take one, even if they were successful and unaffected by this 'crisis'? In order to be consistent with the idea that the government should be able to take money from people and do with it as they please, you would also have to accept the idea that the government should be able to force people to take money and control them in other ways as they please. I am asserting that neither are justifiable, and that both violate those individual rights that the government should be protecting and upholding.
A former member
Post #: 4
[quoteBut what about companies that did not want a bailout, but were forced to take one, even if they were successful and unaffected by this 'crisis'?
Huh, who's being forced to take money they don't want? I missed that story.
Brian
brian_t
Cuyahoga Falls, OH
Post #: 6
Huh, who's being forced to take money they don't want? I missed that story.

Do you remember the closed-door session with banks at the beginning of this 'crisis'? That was one such example. The nine largest banks were forced to accept $125 Billion regardless of their own success - Wells Fargo for example. Here are some other articles on banks large and small being pressured to accept money: 1, 2, 3, 4. To a large extent, though, we cannot know for sure which companies were forced to take money and which were not. The Fed has secretly doled out $5+ Trillion to unnamed corporations, for unknown collateral, and the only people who know who is being given money, or forced to accept money, are certain Congressional committees. The reason they are being secretive is that they fear people will all dump their stocks in those companies or withdraw their money from those banks if they find out who is involved. That's the thing about all of these bailouts - for Keynesianism to work would require fooling everyone all the time. If any specifics about the bailout are released, people will immediately work to counteract it to their personal benefit.
Amy
user 8342056
Twinsburg, OH
Post #: 10
Richard, Perhaps you missed this: My company did NOT accept a dime of bailout money. We own ourselves. The government has done nothing but TAKE our money. Period. So why should the government - a bunch of people who probably have no experience in the financial services industry or in business for that matter - tell my company what to do with its own money. Aren't the capital gains and other taxes we pay enough money to control??????? My company holds $5 billion in assets and $0 in debt. Our profits were $120.7 million the third quarter of last year. We don't need taxpayer money, but we still cancelled all the trips our associates won - no, I'm sorry - EARNED in the name of creating good faith.

Perhaps it's difficult for people to understand who do not take on the risk of owning their own business. I'm sure most people think that it's soooo easy. I guess that explains why so many people love the idea of working on commission, staking thousands in capital, and - hardest of all - dealing with everyone out there who tells them that they're going to fail. ... But if you've ever worked your way up in the world from nothing, and you have only done so in an ethical manner, and your compensation directly affects how well and how many people you have positively impacted through your assistance...then you might get pretty pissed off if someone came along and took away your right to earn the very money that you brought in to your business. Of the people I know who are earning over $200K a year, most of them are giving a significant portion away to people less fortunate and to the causes for which they care.

I can't help but to associate the rights of a business with the rights of an individual, since the majority of businesses in the US are small businesses - privately owned companies.

Humm, what is the gov't track record of "taking care" of my money? You should so the math and calculate how much money the average American is loosing by being forced to deposit money into the social security trust vs. investing it.

So what was it about my company that you thought was "idiotic"? I'm sorry, but you don't even know who I work for, so how can you make a statement like that?

Oh, maybe it's idiotic for people to resist the government taking over their lives. The gov't already tells me who I can and cannot have sex with, if I can or cannot have children, if I can or cannot be married. Next, it will probably tell me what brand of toilet paper I can use. Why? Because apparently it's much better at running people's lives than they are. Tell me, is that what you believe?

Because so far, the gov't has foolishly given $700 billion of our money away to the financial services industry with no audit system in place....Dude, that's like giving giving a crack addict $1,000 and saying, "oh, now you go off and use that money to pay for your rehab." It just doesn't work.

I also don't believe that it's the government's role to bail out businesses or bond holders (except in the case of gov't backed bonds). When you assume ownership of these things, you do so understanding the risk you take on. Diversify your risk. Another obvious.


Also, in the event of a bankrupcy, I'm pretty sure this is the order of liquidation: employee payroll, then the IRS, then mortgages and subordinate debt, then debentures and general creditors, then insubordinate debt, then preferred stockholders, then common stockholders. It's not as if all the employees, creditors, and bond holders just get stiffed.

Anyone who takes a look at the long-term history of the LIBOR could tell you that assuming interest rates would stay at 2% forever would prove historically inaccurate. Do a seach for the LIBOR and you'll see interest rates fluctuate over 4 or 5% in one month. Also, most of the ARMs I've seen only impose limits on rate fluctuation at 17 or 18%....18% interest on a $300,000 loan? That's insane! ARMs = bad idea!

Unfortunately, this country doesn't see the value in educating people about money....I still haven't figured out why the Japanese that I studied for 5 semesters (and forgot) or the Calc II class that I took was more important for my daily life.

Amy
user 8342056
Twinsburg, OH
Post #: 11
Oh, and Fannie Mae and Freddie Mac are only implicitly backed by the federal gov't; Ginnie Mae is the only one of the three that is backed by the full faith and taxation power of the federal gov't.
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