Paul Krugman on Andrew Hall

Paul Krugman,ever the populist,has now jumped into the Hall fray ( read Rewarding Bad Actors NYT Aug.2,2009 ).In his editorial,Professor Krugman fires a broadside against Goldman Sachs’high frequency derived profits and against Mr.Hall.Arguendo,one might  find  high frequency trading to be reprehensible because those with higher speed computers are said to have an unfair advantage over the Lumpenproletariat whose computers dawdle along at much lower speeds.To condemn Mr.Hall,Professor Krugman then argues: »What about Mr. Hall? The Times report suggests that he makes money mainly by outsmarting other investors, rather than by directing resources to where they’re needed. Again, it’s hard to see the social value of what he does. »Does Professor Krugman really think there is something wrong about being smarter than others?Is this an indication of a belief that « equality » really means dumbing down to the lowest common denominator?His linking  outsmarting other investors and not directing ressources where they are needed is not mentionned in the article he cites as a source ( see David Segal ) nor is there a logical link between the proposition that Mr. Hall outsmarts others and the alleged lack of social value in what a Mr. Hall does with his greater smarts unless one were to hold the belief,as Professor Krugman implicitly appears to hold,that being smarter is unfair and has no social value.More’s the pity that such a leading economist should show such a bias.

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James Madison and Hall’s $ 100M bonus

On July 27,2009,I posted a note  ( below: Rémunération des cadres bancaires : les $100 millions d’Andrew Hall ) on the  debate raging around Andrew Hall’s right to a $ 100 million bonus,the  topic now of David Segal’s  front page article in Sunday’s New York Times ( August 2,2009) .In my note I  stated that while there were sound reasons to reform the remuneration of traders to avoid excessive risk-taking and to adjust it to account for risks spread over a long period ( the classic problem of long tailed distributions such as Pareto or Lévy ones) there are even sounder reasons for the provision in the U.S. Constitution  prohibiting the  passing laws that affect contract rights retroactively. These reasons were best articulated by James Madison, writing as Publius, in 1788 ,No44 The Federalist Papers:

“Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. The two former are expressly prohibited by the declarations prefixed to some of the State constitutions, and all of them are prohibited by the spirit and scope of these fundamental charters. Our own experience has taught us, nevertheless, that additional fences against these dangers ought not to be omitted. Very properly, therefore, have the convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not, in so doing, as faithfully consulted the genuine sentiments as the undoubted interests of their constituents. The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. “

President Madison’s wise observations deserve to be heeded by those who now seek to retroactively modify contract rights.

Rémunération des cadres bancaires : les $100 millions d’Andrew Hall

Le débat continue de faire rage.Cette fois, il s’agit de la rémunération d’Andrew Hall, patron de la division Phibro de Citigroup.Celui-ci, contractuellement devrait toucher $100 millions au titre de l’exercice 2009.Cette perspective n’est pas au goût de Ken Feinberg, le tsar des traitements de cadres de sociétés aidées par le gouvernement. D’ou la relance du débat sur le droit à la modification ex post facto unilatérale d’un contrat. Comme l’explique Stephen Grocer dans le Wall Street Journal, la division Phibro a gagné beaucoup d’argent pour Citigroup et continue d’engranger des bénéfices plus que coquets et sera un facteur primordial du remboursement des aides gouvernementales par Citigroup.S’il est nécessaire de réformer le mode de rémunération  des opérateurs sur les marchés ( les fameux « traders ») pour prendre en compte l’étalement dans le temps des risques découlant des opérations (le problème de la longue traine des distributions de type Pareto ou de Lévy par exemple),il convient de le faire sans pour autant battre en brèche la disposition de la constitution américaine interdisant la modification unilatérale rétroactive des contrats. James Madison, commentant  cette disposition en 1788 dans le No 44 des Federalist Papers  en démontre la nécessité:

“Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. The two former are expressly prohibited by the declarations prefixed to some of the State constitutions, and all of them are prohibited by the spirit and scope of these fundamental charters. Our own experience has taught us, nevertheless, that additional fences against these dangers ought not to be omitted. Very properly, therefore, have the convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not, in so doing, as faithfully consulted the genuine sentiments as the undoubted interests of their constituents. The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. “

Ces observations du père de la constitution méritent toutes l’attention de ceux qui aujourd’hui veulent remettre en cause les droits contractuels.

When Bonus Contracts Can Be Broken

Amid all the otherwise legitimate furor over the A.I.G. bonuses,it is refreshing ,and useful,to see the contract law framework for a good legal analysis set out by well regarded law professors such as Charles Fried of Harvard :see When Bonus Contracts Can Be Broken

Contracts Now Seen as Being Rewritable

For an update on the debate on the ability to rewrite employment contracts after signature see the NYT article by Walsh and Glater

Jeff Immelt waives his right to his bonus

The renunciation by Jeff Immelt of his 2008 bonus, though laudable, is not unique. the Chairmen of Costco, James Sinegal, and Whole Foods, John Mackey, in 2007 decided not to take their bonuses even though, unlike the GE shares, the shares of their respective companies under their tutelage had done quite well. Noteworthy in this context is the observation of Costco’ Compensation Committee as reported in Costco’s SEC filings :The Committee …wishes to respect Mr. Senegal’s wishes to receive modest compensation, in part because it believes that higher amounts would not change Mr. Senegal’s motivation and performance”.

Food for thought indeed in these times of compensation packages under ever greater scrutiny. Should other companies follow Whole Food’s lead and establish limits on the maximum cash bonuses as a function of the average hourly wages for all full-time employees ($15, 38/h or $ 31,900/year at Whole Foods which with a maximum multiplier of 19 translates to a top cash bonus of $ 607,800).

Clear from these examples is that money is not the alpha and the omega of compensation policies. After all, paying a CEO twice the current compensation will not mean that the CEO will work twice as hard since that CEO is already supposed to work all the time for the company’s best interests.

Should we, as Messrs Buffet and Munger do, ask whether the senior executives love the money or the business?