Friday, January 15, 2010

What Obama should do if he’s serious about Wall Street Reform

The best concepts are always the easiest to explain. The Global Financial Meltdown was caused by two things. Lack of regulation that allowed CEOs to “go places” that they shouldn’t and compensation schemes that incentivized certain minded CEOs to “go there”

Although it IS the role of government to establish regulatory frameworks it IS NOT the role of government to determine compensation in the private sector, However there is one measure that is incumbent on both the US government and the Canadian governments to abolish as part of a thoughtful response to the Global Financial Meltdown and to ensure that it does not happen again, which is to abolish the capital gains treatment of Executive Stock Options.

These people have no money at risk and yet are being taxed (at half the rate of employment income) as if they did, via the capital gains treatment that they are arbitrarily accorded. It is Executive Stock Options and the lopsided risk/reward outcome that they provide that forms the large bulk of what these CEOs are paid. These CEOs behaviour should be expected to derive from how they are paid, and it often does as they take risks that shareholders left to their own devices would not (eg decision by CEO of Manulife not to hedge large book of market exposure caused by selling synthetic investment products), however tax policy should not be part of the system that rewards and induces this type of bad behaviour. Taxpayers should notm in effect, be ubnderwriting compensation schemes that are at the heart of inducing bad societal outcomes, like the Global Financial Meltdown.

There is no policy rationale at this point in man’s history for according the top one half of one percent with tax breaks that simply induce bad corporate behaviour and outcomes, and especially given that this favorable tax treatment is arbitrary and a relic from the past, when cowboys and gunslingers ruled Wall Street. The capital gains tax treatment of executive stock options should be abolished in the US and Canada. This policy provision is an opportunity for a politician to show real global leadership. I wonder whether any politician of any stripe in Canada is willing to be the first to call for such a sane and highly warranted measure. I would have done that back in April 2009, when I first blogged about that concept in a piece entitled:

Two POPULIST tax revenue increase measures for the Liberals

Brent Fullard
President and CEO
Canadian Association of Income Trust Investors/Taxpayers

647 505-2224 (cell)


Dr Mike said...

I guess we know who controls the levers of gov`t don`t we.

All we have to do is look at who won when the income trust tax was announced in 2006---sure wasn`t the small investor.

Dr Mike Popovich

Anonymous said...

Re: Barons of Wall St concede failures; no apology

I read an article in some Wall Street newspaper that the bankers are dead against a tax on bonuses to recover money, so they are saying that they will give more stock options instead


Fillibluster said...


Sort of like giving pension income splitting to aggrieve the losses of income trust investors?

Brent Fullard