Economic spokesperson for the Obama administration, Ben Bernanke, and the Federal Reserve System continue to underwrite “big”…Big Companies and Big Banks.
The Federal Reserve has just released its survey of senior credit officers. The headlines, “Large United States Banks are Starting to Ease Credit Terms.”
Terrific!
“Large companies may also be finding an appetite to borrow, especially for mergers and acquisitions…The start of January was marked by a record level of M&A and 77 per cent of banks that reported an increase in loan demand said deal financing was a somewhat to very important reason for it.” (See http://www.ft.com/cms/s/0/6dbf2546-2d71-11e0-8f53-00144feab49a.html#axzz1Chh2pOYC.)
But wait…”A flood of cash by investors seeking to profit from rising interest rates is having an unintended effect in the deal world, where this money is being recycled into corporate buyouts.
Investors have been selling bonds which typically lose money when interest rates rise and putting their cash in funds that invest in bank loans that finance corporate buyouts. The loans have floating rates, so the interest they pay investors rises as rates go up.” (http://professional.wsj.com/article/SB10001424052748704254304576116542382205656.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj)
Wow! Have I got a deal here!
And, what about big banks? Well, Bloomberg has an answer for that: “Fed’s Easy Money Helps European Banks Refinance.” (See http://www.bloomberg.com/news/2011-02-01/fed-s-easy-money-helps-european-banks-refinance.html.)
Seems as if European banks are selling record amounts of dollar-denominated bonds to refinance almost $1 trillion of their debt maturing this year. “As a result of the extra dollars created (by the Fed’s quantitative easing), cross-currency basis swaps show that it’s cheaper for European banks to sell bonds in dollars and swap the proceeds back to euros than it was at the same time last year.”
European lenders “sold $43.8 billion in investment-grade bonds in the U. S. (this January), beating the previous record of $42.4 billion last January.”
So the Federal Reserve’s quantitative easing is doing good!
Yes, but what about economic recovery and the smaller banks and smaller businesses?
The Financial Times article continues: “If most of the increased loan demand is for M&A, it may be slow to feed through into higher investment in the economy.
The scope of easier credit also remains limited: Large banks say they are lending more to large companies, but life has become no easier for small companies and small banks.
There was also little sign of any improvement in lending for either commercial or residential real estate.”
It is in the smaller banks and the smaller businesses that solvency concerns still reign. It is in
commercial and residential real estate that economic conditions remain depressed and credit woes abound.
Big banks and big corporations have lots and lots of cash. The reason for this build up in my mind has been for the “Great Acquisition Binge” of the 2010s. (See my post “Where the Real Deals will be in 2011: http://seekingalpha.com/article/244709-where-the-real-deals-will-be-in-2011.) And the bank lending reported above is just adding to the acquisition cycle. The big banks are now increasing lending and, it looks as if the increased lending is going for more and more buyouts. The hedge funds and private equity funds are now stepping up their involvement in this exercise as is evidenced by the interest in floating rate loans.
And, how is this banking activity helping to get the economy growing more rapidly and reduce unemployment?
If anything, the increased merger and acquisition activity will result in a “rationalization” of business which will mean that the acquiring firms will engage in more downsizing of the acquired firms and this will mean that more workers will be laid off.
Companies will become bigger…there will just be fewer companies around.
If this is the case, why does the Federal Reserve continue to underwrite the big banks and the big corporations?
I continue to argue that the Federal Reserve is pursuing quantitative easing as aggressively as it is doing in order to keep the smaller banks going as long as possible so that the FDIC can close as many as they need to in an orderly fashion. Eleven banks have already been closed this year.
Last year the FDIC formally closed a little more than 3 banks per week throughout the year. However, the number of banks in the banking system dropped by two to three hundred (we don’t have the final numbers on this yet) when you count the mergers and acquisitions that took place in the banking industry.
My guess is that we will experience the same amount of contraction of the banking system in 2011. The monetary stance of the Federal Reserve is crucial for the banking system to continue to contract in an orderly fashion. But, this is not necessarily spurring on economic growth.
Until this contraction is over, the feast will continue for the biggest banks and the biggest corporations.
Showing posts with label big companies. Show all posts
Showing posts with label big companies. Show all posts
Tuesday, February 1, 2011
Tuesday, July 27, 2010
Executive Compensation: A Study
The New York Times’ DealBook edited by Andrew Ross Sorkin recently carried an amazing headline, “Study: Boards Use Peers to Inflate Executive Pay.” (See, http://dealbook.blogs.nytimes.com/2010/07/26/study-boards-use-peers-to-inflate-executive-pay/?ref=business.)
And in this remarkable study we find the following:
“Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief executives, helping to contribute to the cascading increases in executive compensation over the last several years, according to an academic study on corporate governance.”
Well, duh!
This was done in the 1970s and I experienced it first hand in the 1980s and 1990s. Yet the quote above states, with astonishment, that “over the last several years” this behavior took place.
The authors of the academic study being reported on, Michael Faulkender of the University of Maryland, and Jun Yang of Indiana University, ”found that companies usually benchmark their executive pay with peers in their industry group, but that they also choose peers that pay more than others.”
That is, not only did corporation use peer data to determine executive salaries, the peers chosen were generally those that had the highest pay among the similar companies.
“The motivation of corporate boards to consciously chose peers that are more generous than ones that are very similar but are just less generous helps to explain, at least in part, the huge increases in chief executive compensation over the years.”
Huge increases?
Oh, yes, “Executive pay has increased substantially over the last few years. For example, in 1965 chief executives at major American companies earned 24 times more than a typical worker, while in 2007 they made 275 times more,” according to the Economic Policy Institute, a nonprofit Washington D.C. think tank.
Note, we are talking about “major” American companies…the “big guys”. These are large bureaucratic organizations that have huge human resources divisions that are given responsibility for the remuneration and benefits of the employees of these companies.
Now, I am not disagreeing with results of the study and I am not disagreeing that these practices helped to contribute to the substantial relative growth in executive pay when compared to the “typical worker”, whoever that might be.
I am just astounded that the results of this study from the late 2000s seem to be such a surprise.
In the late 1960s and early 1970s, when the United States economy was growing at a relatively good pace and inflation began to become a part of the daily life of Americans, large companies had to seek a way to justify the compensation of their employees…all their employees.
Data from peer groups, companies of similar size and similar industry background, became useful in setting pay scales and in arguing with labor unions about worker compensation. Companies began collecting information from other similar companies that would share data and, as the use of peer data became more generally used, it started to be collected by consultants and agencies that could sell the information to interested organizations.
What could be a more reliable guide to executive, and worker, pay than information on what peer groups paid their executives…and workers.
To me, the use of peer data was ubiquitous in large companies by the end of the 1970s.
But, one must be careful with how incentives are administered. Executives found that pay scales based upon peer data could be very used to their advantage. As a consequence, executives became diligent students concerning the use of peer characteristics and of what items could contribute to higher and higher compensation packages.
Let’s see…of course…size, to pick one characteristic, makes a great difference in the compensation received by executives. Bigger companies paid their executives higher salaries.
So, let’s grow the company! Let’s engage in mergers and acquisitions! Let’s move horizontally as well as vertically! Anything to increase the size of the firm! Executives can almost always find reasons to grow their organizations.
Remember the companies we are referring to are the “big guys”!
What about the performance of these companies? That doesn’t seem to matter.
What about the fact that about 3 out of every 4 mergers consummated are unwound in seven years or less? We will just replace those assets with other mergers or acquisitions!
And, the argument can be extended to the “other” special characteristics that apply to the choice of “peers”.
That is, executives could design the strategic plans they used to guide their firms based upon the peer group they had chosen so as to achieve the largest compensation possible.
Could something like this happen? You may express some doubt if you have not read books like “Freakonomics” and “Super-Freakonomics.”
That is, you must be careful of the incentive scheme you choose to stimulate people because that incentive plan will help to determine the behavior of the people you are hoping to influence…and the results you get may not always be the ones you expect.
In this, top executives are no better or no worse than most of the rest of us. They too respond to the reward systems that are presented to them.
And, what about the workers?
Well, they could not choose either their peer group or the design of their company relative to the peer group they wanted to be compared with. Anyhow, ordinary workers competed in a whole different labor market, one that tended to have a lot of substitutes: all peer groups at this level were very similar. Thus, they could not expect much boost in pay from the use of this information.
And in this remarkable study we find the following:
“Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief executives, helping to contribute to the cascading increases in executive compensation over the last several years, according to an academic study on corporate governance.”
Well, duh!
This was done in the 1970s and I experienced it first hand in the 1980s and 1990s. Yet the quote above states, with astonishment, that “over the last several years” this behavior took place.
The authors of the academic study being reported on, Michael Faulkender of the University of Maryland, and Jun Yang of Indiana University, ”found that companies usually benchmark their executive pay with peers in their industry group, but that they also choose peers that pay more than others.”
That is, not only did corporation use peer data to determine executive salaries, the peers chosen were generally those that had the highest pay among the similar companies.
“The motivation of corporate boards to consciously chose peers that are more generous than ones that are very similar but are just less generous helps to explain, at least in part, the huge increases in chief executive compensation over the years.”
Huge increases?
Oh, yes, “Executive pay has increased substantially over the last few years. For example, in 1965 chief executives at major American companies earned 24 times more than a typical worker, while in 2007 they made 275 times more,” according to the Economic Policy Institute, a nonprofit Washington D.C. think tank.
Note, we are talking about “major” American companies…the “big guys”. These are large bureaucratic organizations that have huge human resources divisions that are given responsibility for the remuneration and benefits of the employees of these companies.
Now, I am not disagreeing with results of the study and I am not disagreeing that these practices helped to contribute to the substantial relative growth in executive pay when compared to the “typical worker”, whoever that might be.
I am just astounded that the results of this study from the late 2000s seem to be such a surprise.
In the late 1960s and early 1970s, when the United States economy was growing at a relatively good pace and inflation began to become a part of the daily life of Americans, large companies had to seek a way to justify the compensation of their employees…all their employees.
Data from peer groups, companies of similar size and similar industry background, became useful in setting pay scales and in arguing with labor unions about worker compensation. Companies began collecting information from other similar companies that would share data and, as the use of peer data became more generally used, it started to be collected by consultants and agencies that could sell the information to interested organizations.
What could be a more reliable guide to executive, and worker, pay than information on what peer groups paid their executives…and workers.
To me, the use of peer data was ubiquitous in large companies by the end of the 1970s.
But, one must be careful with how incentives are administered. Executives found that pay scales based upon peer data could be very used to their advantage. As a consequence, executives became diligent students concerning the use of peer characteristics and of what items could contribute to higher and higher compensation packages.
Let’s see…of course…size, to pick one characteristic, makes a great difference in the compensation received by executives. Bigger companies paid their executives higher salaries.
So, let’s grow the company! Let’s engage in mergers and acquisitions! Let’s move horizontally as well as vertically! Anything to increase the size of the firm! Executives can almost always find reasons to grow their organizations.
Remember the companies we are referring to are the “big guys”!
What about the performance of these companies? That doesn’t seem to matter.
What about the fact that about 3 out of every 4 mergers consummated are unwound in seven years or less? We will just replace those assets with other mergers or acquisitions!
And, the argument can be extended to the “other” special characteristics that apply to the choice of “peers”.
That is, executives could design the strategic plans they used to guide their firms based upon the peer group they had chosen so as to achieve the largest compensation possible.
Could something like this happen? You may express some doubt if you have not read books like “Freakonomics” and “Super-Freakonomics.”
That is, you must be careful of the incentive scheme you choose to stimulate people because that incentive plan will help to determine the behavior of the people you are hoping to influence…and the results you get may not always be the ones you expect.
In this, top executives are no better or no worse than most of the rest of us. They too respond to the reward systems that are presented to them.
And, what about the workers?
Well, they could not choose either their peer group or the design of their company relative to the peer group they wanted to be compared with. Anyhow, ordinary workers competed in a whole different labor market, one that tended to have a lot of substitutes: all peer groups at this level were very similar. Thus, they could not expect much boost in pay from the use of this information.
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