Atlas Shrugs in England

The Wall Street Journal reports that a number of hedge funds and their employees are moving from England to Switzerland to escape the new, higher taxes the U.K. has imposed.

For those who don't believe people respond to tax regimes by fleeing high tax areas for low tax ones, think again.

And England will be poorer for it.

Atlas Strikes Again

The New York Times reports on the continued exodus of bankers from the "tarped" firms to boutiques, start ups, international firms, and retirement.

The restrictions on compensation and business practices; the threat of retroactive, extortionate taxes; the attacks by politically-motivated attorney generals who are abdicating their responsibility to protect citizens; the demonstrations at executives' homes by Acorn thugs; the death threats; and the fear of mob violence are driving financial services employees to leave the firms that have received TARP money for greener and more pleasant pastures.

The New York Times spins this as a good thing, since it is making big Wall Street firms smaller. But if size is a problem for these firms, it isn't due to the size of the number of investment bankers and traders - it is the size of the balance sheet risks they took which are being reduced regardless of employment levels.

Instead, this exodus of talent will mean that these firms are losing employees who will help them recover and make money - reducing the value of the government's investment in them.

No private investor, as a price for its investment in these firms, would demand such restrictions or punishments. They would want to make sure such people were staying, not leaving.

Nothing illustrates more clearly how divorced from reality the government and the Democrats are than this destructive behavior: the country is up in arms over the bailout for the financial services firms, and their actions and policies increase the likely taxpayer losses.

Blowback

The Wall Street Journal reports that two AIG employees in Paris have resigned, which is causing AIG to find replacements to avoid defaulting on $234 billion of derivatives contracts.

An AIG default on these contracts will force its counterparties, other banks, to raise capital - further exacerbating the financial crisis.

Who doubts that these two employees, who worked in a profitable division of AIG, left out of dismay and fear? How easy do you think it will be to find replacements given the threats that have been made against AIG employees?

These are just some of the consequences of the political, media, and activist assault on AIG.

Barack Obama sure has changed the political culture of the country.

Atlas Continues to Shrug

Executives continue to flee financial services firms under government control or influence. The CEO of Freddie Mac, David Moffett, resigned after six months on the job. He was brought in after the government took control of Freddie, and apparently is leaving out of frustration in having the company micro-managed by government regulators and in being forced to pursue political, rather than business, goals.

This comes on the departure from Freddie of three experienced investment managers in January alone.

Talented executives continue to flee the TARP firms and other heavily regulated financial firms, making it more likely that these companies will flounder and that taxpayer losses on their investments in these firms will grow.

The demonization of the financial industry by the media and politicians, led by the Democrats, is taking a profound toll on the country.

Atlas "Just Says No" to TARP

A Louisiana-based bank, IBERIABANK Corp. announced that it is returning the $90 million in TARP funds it previously received, making it the first bank to return the money. It said it is doing so to avoid being placed at a competitive disadvantage as result of being tarped.

In a bleak day of economic problems and the strong left tilt of President Obama as manifested in his disastrous budget plan, this qualifies as the best news of the day.

Let's hope more banks return TARP funds soon.

Atlas Continues to Shrug

Jon Winkelried, the co-president of Goldman Sachs, recently announced he is leaving the firm.

While it is certainly possible he would have done so without Goldman being "tarped", including the recent caps on executive compensation, we shouldn't be surprised if he decided he didn't want to work long hours under government restrictions for greatly reduced compensation.

If there was a stock price on the TARP investments, it would have dropped on the news.

Chris Dodd to Wall Street: Drop Dead

Chris Dodd, as a U.S. Senator from Connecticut and a former presidential aspirant in the Democratic primaries in 2008, is an important figure in our national politics. Tragically for our country, he is a real menace to our well-being.

He has long sought to improve U.S. relations with Hugo Chavez, the socialist thug in charge of Venezuela who is doing his best to make himself dictator.

He received low interest rate mortgages from Countrywide in a "Friends of Angelo" program to provide politically important figures attractive mortgages, in a program named for Countrywide's CEO Angelo Mozilo. Countrywide had an extensive relationship with the failed mortgage giants, Fannie Mae and Freddie Mac, providing Friends of Angelo loans to key executives there while Fannie and Freddie were buying Countrywide mortgages.

And why would Dodd get such favorable treatment? Because he sat on the Senate Finance committee that regulates the financial services industry in general, and Fannie and Freddie in particular. Suffice to say, he presided over the massive expansion of mortgage lending by Countrywide/Fannie/Freddie that has helped cause our current financial crisis.

And now Dodd has pulled another caper, worthy of this distinguished record. At the last minute, he inserted to the recent "stimulus" bill a provision that limits bonuses to a broad number of top executives at future and previous recipients of TARP money. It is so destructive, even the Obama administration is opposed to the measure. The measure:

• Encourages TARP recipients to increase salaries, since only bonuses are limited, to offset the reduction in compensation. More compensation will be fixed, rather than performance-based as bonuses provide.

• Motivates employees of TARP firms to leave for financial firms that are not TARP recipients, where these restrictions don't apply. This "brain drain" will increase the likelihood that TARP firms continue to struggle and be unable to repay the government for the money invested in them.

• Provides incentives for TARP recipients to repay the government investment sooner, and discourage potential future TARP recipients from accepting such funds. While this has some positive aspects to it, it is important to recognize that the Treasury Department under both President Bush and Obama want to encourage firms to accept TARP money to strengthen the financial system.

• Violates the principle that ex post facto laws are wrong, since existing TARP recipients didn't realize when they accepted TARP funds that this restriction would be applicable. Recall that the government twisted the arms of some firms to accept TARP money so as to minimize the stigma for the weaker firms for receiving TARP money. The financial sector gets tarped again.
  

This is quite a record for the dear Senator.

Being Tarped

Wall Street firms want to repay the TARP funds so they can manage their firms effectively.

Bankers are leaving firms that have received TARP funds for boutiques or foreign banks, where government-imposed restrictions on pay and business activities aren't relevant.

So I propose a new word, "tarped", defined as:

1. (specifically) having an important investor demand you pursue value destructive activities, such as making bad loans for the sake of lending or capping compensation so your best performers leave.

2. (generally) being screwed, from a financial point of view

Atlas Continues to Shrug

State Farm Insurance announced it will drop coverage of homeowners in Florida after being denied a rate increase by Florida's insurance commission.

State Farm is the second largest insurer to Florida homeowners; its policyholders may now need to get insurance from a state insurance fund. The already-strapped state government will now contend with the ever-increasing liabilities it is accruing in its insurance fund.

If a company can't make money, eventually it will flee the market. There is no clearer measure of the failure of government intervention when businesses cease operating due to restrictions and limitations imposed on their activities.

And to show you that economic idiocy isn't limited to Democrats, although they sure do have quite a bit of it, Republican Florida Governor Charlie Crist said, "Well, they probably charge the highest rates in the state anyway. I think Floridians will be much better off without them." And he wants to kick State Farm's auto business out of the state in response.

Is Atlas Shrugging?

Today's Wall Street Journal discusses how AIG is losing talented executives to other insurance companies. Earlier this month, a number of key executives at Merrill Lynch left - after the firm acceded to political pressure to pay certain key executives no bonus.

Many in the country, including some conservatives, have advocated reducing or eliminating bonuses at financial firms who have received government assistance. These departures are the logical consequence of imposing government mandated or threatened restrictions on financial firms.

As I have discussed in an earlier column, if you pay people below market wages, they will leave their employer - even in this environment. And the companies will be weaker, hurting all of us as taxpayers who have invested in these firms through TARP and as citizens who need a successful financial sector for the economy to thrive.

Ayn Rand's novel, Atlas Shrugged, depicted a world where the successful went on strike to protest the confiscations and impositions they faced by government policy.

It looks like Atlas is beginning to shrug.

Market Prices

On Fox New this morning, one of the hosts articulated what has become a common refrain regarding the financial crisis: criticism of the bonuses to be paid at the end of this year to bank employees. Paraphrasing Brian Kilmeade, he said, "It is crazy that Goldman Sachs and Morgan Stanley are going to pay $6 billion in bonuses at the end of this year."

If you watch the show, one gets the sense Kilmeade is a conservative, and this goes to show you that conservatives don't always (or for that matter don't often) understand free market principles.

It is very simple: if the banks pay below market compensation to its employees - many employees will leave, particularly the better ones. Yes, even in this market. If they are literally paid no bonuses, the firms would collapse. So does the departure of their best employees help these firms get out of their hole? Will this increase the chances of the government making money on its recent investments in these firms? Would you really prefer, and think we are all better off, if the people who ran these firms and filled their ranks were the employees who were attracted to below market compensation?

Of course not.

The flip side of this issue, paying above market compensation, can be seen at the auto companies - where the companies are teetering on the verge of bankruptcy in substantial part due to the above market compensation employees made in the past and today.

Market wages, like all prices, embed a great deal of information in them. Ignore them at your own peril.