White House Set to Appoint a ‘Pay’ Czar

WASHINGTON -- The Obama administration plans to appoint a "Special Master for Compensation" to ensure that companies receiving federal bailout funds are abiding by executive-pay guidelines, according to people familiar with the matter.

The administration is expected to name Kenneth Feinberg, who oversaw the federal government's compensation fund for victims of the Sept. 11, 2001, terrorist attacks, to act as a pay czar for the Treasury Department, these people said.

Kenneth Feinberg, who oversaw payouts to 9/11 victims, will keep tabs on executive pay at companies in bailout.

Mr. Feinberg's appointment could be announced as early as next week, when the administration is expected to release executive-compensation guidelines for firms receiving aid from the $700 billion Troubled Asset Relief Program. Those companies, which include banks, insurers and auto makers, are subject to a host of compensation restrictions imposed by the Bush and Obama administrations and by Congress.

Wall Street has been anxiously awaiting more details on how the rules will be applied. "The law is confusing and a bit ambiguous, and so we're looking for certainty as to how to structure pay incentives," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a trade association.

The move comes amid a series of sometimes-overlapping efforts to curb pay at financial firms following perceived industry excesses that led to the lending boom and bust.

The Obama administration earlier this year issued guidelines that include limiting salary for top executives at some firms receiving TARP funds and requiring that additional pay be in the form of restricted stock, vesting only after the company repays its debt, with interest, to the government. Congress then chimed in with even tougher rules curbing bonuses for top earners at firms receiving TARP money. As part of that effort, lawmakers barred those firms from paying top earners bonuses that equal more than a third of their total compensation.

The White House has been wrestling with how to marry those two efforts, which in combination are more punitive than administration officials had intended.

The government is also pursuing a separate revamping of financial-sector rules that could change industry compensation practices more broadly. For instance, the Federal Reserve is considering rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank.

Mr. Feinberg is expected to focus on pay restrictions related to firms receiving TARP bailout funds, helping companies to interpret the rules and ensure that they are being followed.

For instance, companies have been confused about whether to pay 2008 bonuses, since restrictions on incentive pay didn't go into effect until early 2009. Some firms have made the payments while others have held off. Many firms are also unsure whether the "top earners" targeted by Congress include rank-and-file employees or just executives.

Comments - “Obama is establishing a new cabinet of officials who are accountable only to him. This is an unprecedented power grab.” — Kathryn Reagan

Mr. Feinberg will report to Treasury Secretary Timothy Geithner, but he is expected to have wide discretion on how the rules should be interpreted. Firms likely won't be able to appeal decisions that Mr. Feinberg makes to Mr. Geithner, according to people familiar with the matter.

Mr. Feinberg, founder and managing partner of the law firm Feinberg Rozen LLP, spent several years overseeing payouts totaling more than $7 billion to victims of the 9/11 attacks. He personally reviewed every claim, approving or denying awards and allocating sums to be paid out of the Treasury.

By Deborah Solomon - contact at deborah.solomon@wsj.com

Printed in The Wall Street Journal, page A2

Source: Knowledge Creates Power

Posted: Marion’s Place

Senior creditors: Chrysler deal violates 5th Amendment

If the Obama administration expected the senior creditors of Chrysler to fold their tents under political pressure, they may have gotten a rude shock today.  Thomas Lauria, who accused the White House of threatening the creditors withn humiliation at the hands of the White House press corps, has filed a motion to halt the administration’s machinations on behalf of the UAW in the Chrysler bankruptcy.  Lauria and his allies claim that the Obama administration has violated the Constitution in their bid to devalue the senior creditors’ holdings on behalf of junior creditors, and have some precedent to support the allegation.

The heart of the argument starts on page 8 (via HA commenter Outlander):

III. The Taking of Collateral through a Direct or Indirect Use of TARP Authority is Unconstitutional.

13. The Treasury Department relies on TARP as the purported authority to justify the disparate treatment under the 363 Sale, even though TARP was enacted after the Senior Lenders’ liens on the Debtors’ property were already in place. The Supreme Court long ago recognized, however, that a secured creditor’s interest in specific property is protected in bankruptcy under the Fifth Amendment. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 594 (1935). That case involved a Depression-era statute that was intended to help bankrupt farmers avoid losing their land in mortgage foreclosure. The statute in Radford provided that the bankrupt debtor could achieve a release of the security interests either (i) with the lender’s consent, purchasing the property at its then appraised value by making deferred payments for two to six years at statutorily-set interest rates; or (ii) by seeking from the bankruptcy court a stay of the proceedings for up to five years during which time the debtor could use the property by paying a rent set by the court, which payments would be for the benefit of all creditors, with a purchase option at the end of that period. Id. at 856-57.

14. Justice Brandeis noted that the “essence of a mortgage” is the right of the secured party “to insist upon full payment before giving up his security [i.e., the property pledged].” Radford, 295 U.S. at 580. In invalidating the statute, the Court stated that “[t]he bankruptcy power . . . is subject to the Fifth Amendment,” and that the pernicious aspect of this law was its “taking of substantive rights in specific property acquired by the bank prior to the act.” Id. at 589-90 (emphasis added). Thus, Congress could not pass a law that could be used to deny to secured creditors their rights to realize upon the specific property pledged to them or “the right to control meanwhile the property during the period of default.” Id. at 594. That is precisely what the Treasury Department would have Chrysler do here, with respect to the Chrysler Non-TARP Lenders’ property rights that were acquired prior to the enactment of TARP.

15. Relying on purported authority provided by TARP, the Treasury Department is demanding that Chrysler’s assets be stripped away from the coverage of the Senior Lenders’ liens – thereby impairing the rights of the Senior Lenders to realize upon those assets – so that those assets may be put in New Chrysler and used to the benefit of unsecured creditors in this proceeding, who will then be paid much more than the Senior Lenders. But, even assuming that TARP provides the Treasury Department with authority to provide funding to the Debtors and impose the transfer of collateral away from the Senior Lenders, TARP was enacted long after the Senior Lenders contracted with the Debtors and received senior liens on the Debtors’ property. Radford specifically disallowed the use of a law to retroactively alter existing liens on property.

16. Here, the proposed sale of the Debtors’ assets will leave the Senior Lenders with a diluted pool of assets and no further interests in the operating assets covered by their specific liens. The Constitution forbids this application of a law retroactively to undercut the Senior Lenders’ pre-existing property rights in favor or inferior creditors.

17. Finally, that the Treasury Department would take these unconstitutional actions to help the United States address difficult economic times is not an answer. Indeed, the same justification was expressly rejected in Radford, where Justice Brandeis noted that a statute which violated secured creditors’ rights, but which was passed for sound public purposes relating to the Great Depression, could not be saved because “the Fifth Amendment commands that, however great the nation’s need, private property shall not be thus taken even for a wholly public use without just compensation.” Id. at 602.

18. What is really striking here is that what is being proposed by the Sale Motion would strip the Collateral away and allow it to be put to use as new capital in New Chrysler for the benefit of existing and other creditors – even though the Chrysler Non-TARP Lenders have been given no opportunity to realize upon that Collateral to the point of full repayment ahead of at least $14 billion of selectively identified unsecured creditors.

One might think that a Constitutional scholar like Barack Obama would have already known that, but either this precedent escaped him or he doesn’t care about it at all.  Brandeis acted to uphold contract law, especially in the face of a government interest in paying off politically-connected unsecured creditors ahead of the senior creditors.  There is no other reason for Brandeis to make that decision, as only government could insert itself into the contractual relationship during a bankruptcy proceeding — just as Obama has done with Chrysler.

Lauria’s argument seems very compelling here, especially given Brandeis’ rather clear assertion that bankruptcy proceedings have to fall within the 5th Amendment — and that government can’t implement a taking to satisfy its own arbitrary aims by ignoring the relationship of the creditors to the default.  We’ll see whether the court rebukes Obama.

POSTED AT 1:36 PM ON MAY 4, 2009 BY ED MORRISSEY

The Weimar Solution

“The best way to destroy the capitalist system is to debauch the currency,” said Lord Keynes.
Ben Bernanke disagrees. A student of the Depression, the Fed chair appears far more fearful of deflation — a vicious cycle of falling prices, debt defaults, home foreclosures and rising unemployment.

Deflation is what America underwent in the 1930s. A Fed-created bubble burst, causing margin calls to go out to stockholders, who ran to their banks that, besieged, collapsed, wiping out a third of our money. As Milton Friedman, who won a Nobel for his thesis that the Federal Reserve caused the Great Depression, told PBS in 2000: “For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing … with millions of people having their savings essentially washed out, that decline was utterly unnecessary.

“(T)he Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were … urging them to do that. So it was … clearly a mistake of policy that led to the Great Depression.”

Is Bernanke fighting the war of 1929 in 2009? Surely, today, with the explosion in M1, the basic money supply, there is no shortage of dollars out there, even if they are not circulating fast enough.

To end our recession, Bernanke may be running an even greater risk: hyper-inflation. This has destroyed more nations than deflation or even depression.

Recall: It was French military intervention in the Ruhr in 1923, to force payment of war reparations, and Weimar’s decision to let the currency fall and pay the French in cheap marks that led to the wipeout of the German middle class, the discrediting of that democratic republic and the Munich beer-hall putsch of Adolf Hitler.

“The first panacea for a mismanaged nation,” said Ernest Hemingway, “is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

Which brings us to last week’s shocker...

The Fed will buy up $300 billion in long-term Treasury bonds and spend $750 billion more buying sub-prime mortgages to remove them from the balance sheets of ailing big banks, to get the banks lending again.
Bernanke is printing money to buy U.S. bonds.

This new gusher from the Fed, after the $700 billion TARP bailout, comes on top of a Congressional Budget Office estimate that this year’s deficit will be $1.85 trillion, 13.1 percent of gross domestic product, more than twice the share of the U.S. economy of the largest previous postwar deficit.

Concluding the dollar is being abandoned in a frantic Fed effort to stop the recession, markets reacted instantly. The dollar plunge was the steepest since the Plaza Agreement of 1985. Gold shot up to $950 an ounce. Silver had a 12 percent run-up, the sharpest ever. Oil prices surged above $50 a barrel. Commodity markets advanced.

The Fed seems to have confirmed the fears of Premier Wen Jiabao, who said that China is “definitely a little worried” about the value of the U.S. bonds Beijing has purchased with the dollars piled up from her trade surpluses with the United States.

Can one blame the Chinese? They have already been burned on their U.S. investments. And if the defense of the dollar against its ancient enemy inflation is being abandoned, and protecting the dollar is to take a back seat to the Fed’s fight to avoid deflation, than it is indeed time to get out of the dollar and dollar-denominated assets.

For inflation is theft. It make liars and cheats of governments. By eroding the value of a currency, inflation punishes savers and creditors and rewards debtors. And what nation is the biggest debtor of them all? The United States of America.

Insidiously, inflation consumes the value of cash, savings, municipal bonds, corporate bonds, Treasury bonds and T-bills. Friends who lent America money, who bought our debt in good faith, are robbed and made fools of, while speculators who bet against America by shorting the dollar in the currency markets are vastly rewarded.
Given the $3.6 trillion budget Obama plans, the $1.8 trillion in red ink he will run by Oct. 1 and the trillions the Fed is pumping into the economy, gross domestic product should spike, as it did after the far smaller stimulus package of 2008.

We will feel a healthy glow, and folks will begin to sing, “Happy Days Are Here Again.”

Yet, one senses that we are doing again exactly what we have done before in this generation. Rather than endure the pain and accept the sacrifices to cure us of our addiction, we are going back to the heroin. And this time, with Dr. Bernanke handling the needle, we may just overdose.

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By Pat Buchanan who is a nationally syndicated columnist and author of Churchill, Hitler, and "The Unnecessary War": How Britain Lost Its Empire and the West Lost the World, "The Death of the West,"  "The Great Betrayal," "A Republic, Not an Empire" and  "Where the Right Went Wrong."