I find it ironic that the conservative capitolists would be opposed by such a system.
I would whole heartedly be against it if the government was setting these limitations on all companies. But they aren’t. I think we need to be very vigilant to make sure that NEVER happens.
That being said it’s nothing more than “Terms of agreement”. The executives have the right to agree to the terms or not, and move on or not.
In either case there is a definitive “Out” that basically says “Hey take as much stock as you want. If you pay back the loan you can take the stock as compensation”. Of course that means two things, first you actually have to pay the loan back, something I think most of them thought they wouldn’t have to do and second the company stock has to be worth something without government backing…another thing I think most of think won’t happen anytime soon.
I’d actually look at this as an opportunity if I where a “Good” up and coming exec type. First when in the hell did 500K become something to sneeze at and second if I was good I would look at the situation and know whether or not I could turn the company around. I would know that in 5-10 whatever number of years I’d have a HUGE bonus coming my way cause I’d take that stock option and ride it.
Okay, so let me get this straight. Wachovia is on the brink of absolute disaster. If that bank fails it will take a whole host of people and things down with it, same thing with the mortgage company in California whose name escapes me at the moment. Wells Fargo steps in buys said mortgage company AND Wachovia, takes federal money in the mean time. Now you are going to cap the pay of arguably one of the better run banks in America who is actually doing good things right now?
Secondly, in Massachusetts well run banks are REFUSING bailout money because of all the strings attached. Said money is supposed to fuel mortages and small business loans. So…said banks are refusing to take this and instead sticking with their tighter restrictions on lending and underwriting. You really think this is going to get them to accept federal bailout money to free credit markets.
This is a TERRIBLE idea.
Do you think those banks should be accepting the money?
If the markets are so frozen how come people can get car loans, home loans and credit cards still?
I’ll also argue the feasibility of this mentality that companies should be operated on credit. Banks aren’t asking for NO risk, they are asking for LESS risk, like it was 30-40 years ago.
If you don’t understand why corporations would want loans then there really isn’t any point in having this discussion with you.
Companies do not ‘operate on credit’ however credit creates a situation whereby companies can grow and expand, hire and maintain jobs. Working capital lines are exactly that, used for working capital to smooth out bumps in the road when sales may peak or trough. Venture debt is exactly that, debt that is used to bridge companies between their A rounds and their B rounds. Those are only two legitimate examples of why a company would want a line of credit. If we want to freeze these lines then you will see a huge downward spiral in job creation that will only worsen over time.
And the idea that people are getting car loans, home loans and credit cards is laughable. It isn’t happening and indeed these markets are contracting in a big way.
“If this is ‘A gift’ then indeed these companies are no longer private industry…”
I think that’s a false dichotomy. These companies have in fact been gifted with the use of funds that would not have been available to them at this time in the private market, i. e., if those funds were not being looted–oops, I mean taken–from the rest of us. Consequently, I tend to agree with Millco that these companies are no longer private, not theoretically and not for most practical purposes either.
I regard any restrictive conditions such as these are a good thing, inasmuch as they tend to reduce the amount of looting–oops, I mean transferral–of wealth that is going on.
Why close when you can get strings attached capitol…unless they expect some other kind of write off where they get lots of $$$ for closing.
The companies just plain can’t get the loans in some cases, in other cases it isn’t worth taking the loan at the fees being quoted therefore they just choose not to borrow and not to expand and just wait it out. ergo no job creation and further erosion of investment. I don’t understand your scenario that they are somehow going to get lots of $$$$ for closing. Closed is closed.
If the markets are so frozen how come people can get car loans, home loans and credit cards still?
I’ll also argue the feasibility of this mentality that companies should be operated on credit. Banks aren’t asking for NO risk, they are asking for LESS risk, like it was 30-40 years ago.
~Matt
Just as some economists are saying not to send checks out to Americans, because we will just save it or pay off a bill, many banks have taken tarp money and sat on it to shore up their position. In a sense they are saying "do you want us to be strong or make loans?". I really don't want to see the govt deciding who does and does not get loans, we had that in housing, with GWB and Barney Frank pushing to make (bad) loans to facilitate the "dream" of home ownership.
If you don’t understand why corporations would want loans then there really isn’t any point in having this discussion with you.
I fully understand why a company would “Want” a loan, but that doesn’t mean they should be given one simply because they “Want” one.
Companies do not ‘operate on credit’ however credit creates a situation whereby companies can grow and expand, hire and maintain jobs. Working capital lines are exactly that, used for working capital to smooth out bumps in the road when sales may peak or trough.
A growth capital loan is entirely different than a “line of credit” loan. Buying a piece of equipment is one thing, running a constant balance on a line of credit is another. If you are constantly operating on a balance on a line of credit then you are indeed “Operating on credit”, which is entirely different than having a line of credit you access to supplement cash flow issues.
It isn’t happening and indeed these markets are contracting in a big way.
Of course it’s retracting, but you’re making the assumption that is a bad thing. I’m saying it’s a good thing in the sense that we are now “Lending” to “Qualified” borrows that will be more likely to pay the loan back, as it’s supposed to be. Again not NO risk, just less.
Lending practices now are still FAR more lenient than they were even 20 years ago in both the car and housing markets.
I liked the plan that Credit Swisse came up with for some of its 2008 bonuses. It created a pool out of some of its unmarketable “toxic” financial vehicles and then gave exectutives a share of the pool as their bonus. It got remarkably little coverage but it was a brillant plan. A perfect way to focus employees’ attention on the business which is what bonuses are supposed to do. It also got the stuff that was put in the pool off the bank’s books. Killed two birds with one stone.
Needless to say, the folks who got paid this way were pissed but a) they had a role in coming up with this junk in the first place so they got what they deserved and b) there is some possiblility there shares may actually be worth some real money in a few years when (if) things turn around.
What you fundamentally don’t understand is that access to these “working capital” lines of credit is extremely limited. If you don’t have access to this then you downsize your company, you downsize your company you lay off workers, you lay off workers they don’t spend, then the cycle continues.
You say you are a manufacturer. What do you manufacture? At what point do you start to worrry when the orders dry up?
I think I operate in a bigger world than you do (that comment is not perjorative). At some point it is going to start to affect you whether you admit it or not. Credit helps companies grow. Without credit you have a downward spiral. I am seeing signs of this everywhere.
I’ve closely followed the carrer of Jamie Dimon (CEO of Chase) and his track record is rather impressive. I would say he’s one of the more forward thinking CEO’s in the banking industry. The best thing that ever happened to him was getting fired by Sandy Weil when he was heir apparent at Citigroup. Jamie canned Sandy’s daughter for incompetance and started a feud that ended with him leaving to take the helm at Bank One in Chicago. I’ve been at Citigroup for 15 years and seen a lot of really shitty management styles come and go.
If you don’t have access to this then you downsize your company,
The only reason you would “Downsize” due to lack of credit line would be because you are operating on that credit line.
If I have a credit line that I only need for “Emergencies” not operation I would not “Downsize” if that credit line becomes unavailable. If indeed I ran into an emergency at the time that the credit line was unavailable then I would be forced to downsize. What your suggesting is that LOTS of companies are running into emergencies at this point. What I’m suggesting is that a lot of companies got into the habit of operating on “Easy money” and now it’s coming back to haunt them.
**You say you are a manufacturer. What do you manufacture? At what point do you start to worrry when the orders dry up? **
I make lots of things for different people ranging from repair parts to automation equipment in sectors from water reclamation to aerospace and I’ve worried about orders “Drying up” pretty much on a daily basis since the day I was in business…not sure how any of that is relevant to the conversation at hand though.
At some point it is going to start to affect you whether you admit it or not. Credit helps companies grow. Without credit you have a downward spiral. I am seeing signs of this everywhere.
I’m most definitely affected and different “Contractions” have been affecting me in one way or another since I’ve been in business. Again I don’t see how this is relevant. The fact that I’m going to suffer has no bearing on whether it was right or wrong for the American economy to become addicted to easy credit.
The fact of the matter is that credit has been getting easier and easier to get for the last 20 years. When it goes from having to sign away your first child to people offering to send me cash without collateral, there’s a problem.
We are definitely in a downward spiral, but you believe that is a bad thing and ultimately I believe it can be a good thing resulting in a stronger economy that isn’t built on “Subsidized” cash.
It’s funny how people howl and complain about restrictions on the pay of Wall St. execs who got bailouts but then demand restrictions on auto workers pay as a condition for their bailout. I know, I know…that’s different.
At what point a family must stop getting credit cards to pay for everything until ‘finances get better?’
It’s the same thing with a company.
Yes credits are important, but there is a fine balance there. And many of the execs of these companies failed to notice, or deliberately ignored it.
For companies in such positions, ending up having loans at a better rate than anywhere else, it seems fair that there is some tradeoff. And the tradeoff is done with a cap on exec bonuses. Perfectly fair.
Granted I run a crappy little know nothing manufacturing company. Me along with a plethora of other crappy little know nothing companies have one montra. The second you find out that a customer is running to the bank to get money based on invoices they are headed for trouble and you better get your money now.
Since we are small companies the “cycle” hits us faster than the big companies and RARELY does a company recover from that type of “Operating on credit”.
Not only do you have to make a profit, but now you have to make a profit to cover the cost of borrowing money on your profit. At this level it’s a vicious cycle that almost always ends up in failure. This is not borrowing money for growth, but borrowing money to stay alive…which usually leads to death.
Again I concede a 25 billion dollar company is operating at a completely different level than I, but so far no one has been able to tell me how this simple principle can be “Gotten around” by “Scale of economy”. It’s the same law, just with more zeros.
No credit means much slower growth. Too much credit means easy access and “subsidizing” otherwise dead companies.
Strong companies are buying back their own stock right now. Struggling companies are going under…I’m somewhere in the middle as usual
It’s funny how people howl and complain about restrictions on the pay of Wall St. execs who got bailouts but then demand restrictions on auto workers pay as a condition for their bailout. I know, I know…that’s different.
I don’t remember anyone calling for restrictions on auto worker’s pay. Let the market decide what each job is worth.
I am not going to be able to convince either you or Matt of the need for credit in companies to fund growth so I will gracefully bow out here. I strongly disagree that the situations I am in are “easy credit” situations. I think that is a glib answer to a complex question.
We will get to find out how capping executive compensation works for our economy over the next year or so. It will be a fascinating experiment with all kinds of unintended consequences.
