Bloomberg reports that the Federal Reserve, losing a federal lawsuit yesterday, must identify the financial firms that received special emergency loans. You may remember that the Fed refused to disclose any details of these loan programs, arguing that the knowledge that a specific firm received emergency loan would undermine its competitiveness or even spark a run on that bank — so of course, it would be safer to keep that knowledge solely in the Fed’s wise hands. The details withheld by the Fed included the names of the firms, the loan amounts, and the assets put up for collateral.
Fortunately, Manhattan Chief U.S. District Judge Loretta Preska rejected this speculation: “Conjecture, without evidence of imminent harm, simply fails to meet the Board’s burden” of proof.
I agree. As taxpayers, we became — like it or not — lenders to and investors in these firms. We should have the right to see what’s in our portfolio. I for one look forward to seeing these details come out — Judge Preska gave the Fed five days to comply.
I am writing to thank you for everything you have done over the past year to suture our economic wounds and stimulate our housing market. It has been very helpful. Now, please stop.
What I loved about her article was how her anecdotes put a human face on real, unintended consequences of these programs. An informative and persuasive read — I’d comment more, but I urge you to just read it.
What you might have missed is the Justice Department’s announcement last week of a settlement with Consolidated Multiple Listing Service, Inc. (CMLS) of Columbia, SC. The Justice department argued that CMLS implemented anti-competitive restrictions such as prohibitions on home offices and “active involvement” requirements that would essentially rule out fee-for-service brokers who only charged for the specific services the consumer desired (a la SmithAdams). The result, according to the settlement: “Columbia-area home sellers [were] unable to hire brokers with innovative business models such as ‘fee-for-service’ brokers who would provide only the services the sellers desired at a lower cost than full service brokers typically charged.”
Fortunately for consumers, CMLS agreed to repeal these anti-competitive rules to settle the case. See the full text of the CMLS settlement here on the DoJ Antitrust Division web site.
Assistant Attorney General Varney commented in the DoJ press release:
“Today’s settlement will remove unlawful impediments to competition for real estate brokerage services in the Columbia area and will lead to more choices and lower brokerage fees for South Carolina consumers. For most Americans, purchasing a home is the most significant purchase of their life. This settlement demonstrates the Department of Justice’s continuing commitment to preserve competition in the real estate brokerage industry.”
When it comes to designing compensation programs, my good friend and experienced HR executive repeats this mantra: “compensation drives behavior.” As I talk to people about the incentives created by the traditional commission fee structure in real estate, this refrain often comes to mind. I thought of it again as I read the April 1 Washington Post article “Four Banks Are First to Return U.S. Aid,” discussing that, while returning taxpayer money would typically be viewed as a good thing, in this case it threatens to undermine the goal of increasing lending (so much irony here).
The primary reason these banks are rushing to repay this money?
“Banks seeking permission to repay the Treasury, however, argue that compensation restrictions are the real threat to lending. Neil M. Barofsky, the special inspector general who oversees the investment program, testified before Congress yesterday that a survey of nearly 400 aid recipients found widespread concern that limits on pay will hamper retention of top employees, putting aid recipients at a competitive disadvantage.”
It should not be surprising that executives at banks receiving TARP money, especially those that were not in bad shape, would prefer not to have constraints on their pay. Indeed, that same day, the House of Representatives approved the Pay for Performance Act of 2009 that prohibits “unreasonable or excessive” compensation or bonus payments that are “not directly based on performance-based measures” (it’s important for the Members to show the appropriate outrage to their constituents).
To recap: we got into this mess partly because certain people were getting highly compensated for making loans they shouldn’t have been making; now that we need lending to increase to stimulate the economy, we’re going to implement curbs on compensation to the executives at the banks that take federal funds intended to spur that lending. Anyone else confused/frustrated/angry?
In conclusion: never underestimate the unintended behaviors and outcomes that compensation methods can create.
Columbia University’s Edmund Phelps was on American Public Media’s Marketplace last week contending that we rethink our national obsession with home ownership.
Both pieces are very thought-provoking. I do think there is something disconcerting about the American Dream somehow becoming synonymous with home ownership (it wasn’t always like that), and I do have concerns about the many aspects of our government policy that encourage this mindset. To me, it is undeniable that the mortgage interest deduction played at least some role in the housing bubble run-up.
While I do believe that home ownership and renting should be theoretically economically equivalent over the long run, there are some intangible attributes to home ownership (pride of ownership and emotional investment to neighborhood development and care among them) that cannot be ignored. Anyway, the spirited back-and-forth in the comment section of the Marketplace piece is as interesting as the Phelps interview itself. Hope you find this interesting as well.
Our friend Jill Erber, owner of specialty cheese shop Cheesetique in Alexandria, VA, makes a wonderfully articulate and down-to-earth protest of protectionist measures taken by the outgoing Bush administration against, of all things, Roquefort cheese. You tell ‘em Jill!
