Under the microscope

With the bank bailouts, we’re seeing an interesting phenomenon – the increasing scrutiny of the spending of the banks.  Now that some taxpayer money is directly injected into these companies, any spending they do is seen (rightly or wrongly) as use of public funds.  As an example, this story “Bailed Out Bank of America Sponsors Super Bowl Fun Fest” from ABC News:

Despite a near collapse that required $45 billion in federal taxpayer bailout funds, Bank of America sponsored a five day carnival-like affair just outside the Super Bowl stadium this past week as President Obama decried wasteful spending on Wall St.

The event – known as the NFL Experience – was 850,000 square feet of sports games and interactive entertainment attractions for football fans and was blanketed in Bank of America logos and marketing calls to sign up for football-themed banking products.

The bank staunchly defended its sponsorship, saying it was a “business proposition” and part of its “growth strategy.”

Now normally a private company does not get this type of scrutiny.  People don’t pay too much attention to their marketing budget or the bonuses they pay, etc.  It’s also true that commonly it’s not in either the company’s or their customer’s interest to publicize a dispute or screwup… quiet settlements are more likely.  (Note: I’m not saying that B of A’s marketing decision was good or bad, it’s just that in previous years this would not be news; and so this is new for B of A to have to respond to this type of report).

In the public sector, however, it’s common for screwups and inefficiencies to be exposed, since groups like Citizens Against Government Waste are constantly looking for these things and have little reason to stay silent (not that they catch everything, obviously, but they are looking!).

I suspect that most private companies would find that they could find a lot more efficiency if they were constantly under the microscope in this way.  So I guess the question is whether our shareholders would benefit from more stringent monitoring of how companies operate (whether they’re profitable or not), and if so, how could they achieve it?

Update on Feb 4: Yesterday news came out about a proposed pay cap of $500K for bank execs.  I think the point here is to make sure that taking bailout funds ‘hurts’ – the last thing you want is for every company and industry to line up at the government cash window.  I think it sends the right message.

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Comments

  • Jim  On February 4, 2009 at 11:00 am

    The problem with the government getting involved in business doesn’t work because they 1) do not know how to run a private business and 2) they do not have the appropriate infrastructure to run a private business.

    I am not sure if I support the first “bailout” or not. I do know I do not support the current “stimulus” package, which I hope you would agree is the Democrats attempt to use a crisis to further their control over the society, along with a little stimulus.

    On the first point what I mean is this: I run a small company and someday may have to “bailout” another company if they need help and I have an interest in helping – acquisition, etc.

    The FIRST thing I would do is stop ALL discretionary spending, all bonuses and all salary increases at the “bailout” company! This is not “brain surgery” – as they say. I just assume the government will do this when they “loan” billions” to these companies, but obviously the old adage that “assumptions will make me an ass” is true.

    Do you have any idea why they wouldn’t do this? Could it be that their political ties allowed them to get away with thievery from the “bailout” – which is what often happens with government involvement?

  • Curt  On February 4, 2009 at 11:25 am

    Remember that the initial bailout was proposed by Paulson on his three page document, and it went through very fast as it was seen as a do-or-die crisis. I think you’re right, that if you took any time to think about it, you would immediately try to cut back on all discretionary spending and try to see how to ‘right the ship’. But it was all rushed.

    I find it strange now that the banks are arguing that much of the ‘bonus’ money is really ‘salary’ – but if that’s true, then why don’t they just pay it during the year? (I think if they did pay it through the year, the annual salaries would be shown to be way above industry averages for many positions). At this point they’re just not in a position to get much sympathy!

    It does feel to me that the current ‘stimulus’ bill is not well focused. If it’s stimulus, then it should ensure money is spent soon. If it includes tax cuts, then they also should have immediate impact. But it seems like a mish-mash that is also being rushed too fast. I think they should slow down, reconsider and see if they can come up with something better.

  • Jim  On February 4, 2009 at 12:28 pm

    Sounds today like the path mentioned in your last sentence is being followed, though the Dems are having to be forced to reconsider.

    I do not excuse the government due to “rushing” the bill through. The things I suggested are so basic that there had to be a reason why they were not specified with the handouts. If it only took two seconds to pass the bailout, I would have required my suggestions above. Why didn’t the government?

  • Curt  On February 4, 2009 at 2:02 pm

    This may be beyond my powers of analysis… (note that I make my living trying to figure out how businesses actually do things, to translate those processes into software, so it’s just the way I look at things).

    Here are some factors, I think:
    1. Basically bankers in the Treasury Dept are the ones pushing the plan. They most likely would like to see the banking industry survive in the current form.
    2. Initially the ‘bailout’ was pitched as ‘buying troubled assets’ so was perhaps not seen as a full (and only possible) lifeline.
    3. Coming from a Republican administration, there was surely reluctance to be seen as ‘meddling’ too much in how the businesses were run. (That notwithstanding, of course many people noted the irony of a Republican initiated ‘socialism’).

    There are surely more factors however…

    Proably even more important now is what to do next about the banks. My feeling is that many of them are essentially insolvent if you mark their ‘assets’ to market, and they are not disclosing the full amount of ‘bad assets’ (i.e. paper that they value on their books at much more than current market prices).

    In the S&L crisis of 20 years ago, the government basically took over insolvent banks and wound them down. I think more of the same needs to happen now, painful as it may be (rather than propping them up with loans and guarantees and whatnot). I guarantee that the U.S. would have recommended this course to any other nation in our current circumstances (much easier to recommend the bitter pill to others than to swallow it yourself!).

    This post is very discouraging about the whole issue (excerpt below):
    http://www.nakedcapitalism.com/2009/02/bad-bank-assets-proposal-worse-than-you.html

    “The Obama Administration, if the Washington Post’s latest report is accurate, is about to embark on a hugely expensive “save the banking industry at all costs” experiment that:

    1. Has nothing substantive in common with any of the “deemed as successful” financial crisis programs
    2. Has key elements that studies of financial crises have recommended against
    3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

    The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was.”

  • Jim  On February 5, 2009 at 11:08 am

    I think we are in agreement these “bailout/stimulus” packages (or “bailout/porkapalooza” packages – as Hugh Hewitt likes to call them!) are probably not the correct thing to do. And it is not a partisan thing. I read many warnings when Bush signed the first bailout that the worst effect would be opening up the possibility of a “porkapalooza” by the Dems. Prescient!!

    I am not sure what we should do now. But I think the Republicans stopping – or at least correcting the “porkapalooza” to a short term targeted job creating program with some significant tax cuts (not rebates to the non income tax payers – see my post today) may be a first step in slowing down this train.

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