Watch closely the conflict of interest between stockholders and executives.
The New York Times reports that executives of banks are rushing to pay back loans from the government to the detriment of the banks themselves.
Executives at a relatively healthy North Carolina bank cut shareholder dividends and are selling more stock — diluting current shares — in a rush to pay back cheap, 5 percent, government “Troubled Asset Relief Program” loans. Instead they should be taking that cheap money and leveraging. Why are the executives doing it? Because they don’t want Obama and Congress capping their compensation to half a million a year. People, pension funds, endowments, and increasingly, the American tax payer, own stocks in banks for two reasons: for income — banks share profits (dividends) — and for future income — we can sell stocks later.
Stockholders hire hands — bank executives — to manage the banks to earn sustainable profits and keep share prices steady. But these hired hands can hurt us for their own purposes. In economics jargon this is called a principal-agent problem: the shareholder’s agent jerks the principal around.
The labor movement has been trying to get shareholders to realize they need to fight back, well, that they need a union with executive pay watch and shareholder-rights campaigns. Unions supporting shareholders? Weird!? Not if you think who needs pensions and what pension funds own.
Even Business Week of all places, has been rallying against one of the market’s central problems — principal agent — every year by publishing salaries of top CEO’s and showing no connection to a CEO’s performance and their millions of dollars of performance pay.
