A Snowball's Chance in Hell

[haha]

washingtonpost.com

This would be a real improvement. Therefore it will not happen. After all, this is 21st century America.

Ha

 

[Ed_The_Gypsy]

James Grant for president!

 

[Eagle43]

Great article. Thanks Ha.

I believe that real capitalism allows people to fail as well as succeed. That's the beauty of the system. Gordon Gekko said, "Greed, for lack of a better word, is good." But, only if individual failure, or at least the threat of it reduces irrational exuberance. And, of course, you're right. This will never happen.

 

[Independent]

This probably belongs in "Political Issues", but I'll comment here anyway.

This sounds like an interesting addition to other reforms. But note that there were a lot more bank panics under the old system than under the FDIC system, so this is not a panacea.

The "banks" involved this time are investment banks. They were partnerships until fairly recently (1990's ?). I believe that general rule for partnerships is that the partners were individually liable for the partnership's debts. It's plausible that these firms would have taken fewer risks if they had remained partnerships.

Economists will say that limited liability makes it easier and cheaper to raise capital and find managers, so whatever we would gain in safety we'll lose in higher costs. That may be a favorable trade-off.

 

[FUEGO]

If shareholders of financials become personally responsible for the debt of the company they own, then we would probably see a lot of index funds ex-financials. And any half way competent investor would set up a shell LLC to own their financials, or buy shares in a holding company that own financial shares. At least I assume you could limit liability in this manner.

As to liability of the executives of these firms, that would certainly shut off a lot of risk taking and innovation. While there would be benefits, I'm not sure I would want the future evolution of our financial and capital markets to stop in their tracks.

 

[dex]

washingtonpost.com

This would be a real improvement. Therefore it will not happen. After all, this is 21st century America.

Ha

Very True - The USA didn't want to take its medicine during the '30 so it planted the seeds of today's problems.

All this means is that we keep trying to kick the pain into the future - and that means it will be a greater pain.

 

[walkinwood]

The heads we win, tails you lose deal is a problem with "professional management" in general, not just financial companies. Even if we didn't bail out the financial companies, the people who made money (and were smart enough to stash it in cash) would have walked away with no repercussions while their shareholders & investors would have suffered. Compensation reform or reform of share holder rights is needed if you want to hold management of public companies responsible. I like the Brazil idea mentioned and agreee - fat chance of it ever happening here. We are, unfortunately, an Oligarchy- not capitalist or socialist.

 

[MichaelB]

Excellent link haha, thanks.

Until 1999, Goldman Sachs was a partnership, with the general partners bearing general and unlimited liability for the firm's debts. Today, Goldman -- like the vast majority of American financial institutions -- is a corporation. Its stockholders are liable only for what they invested, no more. And while there are plenty of sleepless nights, the constructive fear of financial oblivion is, for the senior executives, an all-too-distant nightmare.

This is not the first time I have heard this as one of the key factors in our financial mess, and it rings true.

 

[chinaco]

Bank fails and Banker fails is a good.

Bank fails and Banker fails and winds up in jail is better!


The really big financial institutions should be broken up.

Banks of all form need to be restricted in terms of the business endeavors they can engage. The days of the financial conglomerate should end.

 

[traineeinvestor]

As much as the banking industry deperately needs reform, imposing:

1. liability beyond the paid in share capital on shareholders; and/or

2. extensive liability on individual bankers,

are not not appropriate solutions.

If shareholders face unlimited liability, who would become a shareholder in a bank? Not me and I suspect not many other people either. Absent adequate share capital, banks wont have the resources to perform a lot of the functions which they do now - like lend people money to finance businesses, buy homes etc.

As far as the individual bankers are concerned, moderation of bonus packages is (IMHO) appropriate, medium term partial clawback is a good idea and limiting institutional risk is a must, but longer term or more extreme consequences are not a sensible solution. We want both the banks and the bankers to take an apprpriate level of risk - by lending money, providing hedging and other financial services. If we impose consequences for taking these risks at a personal level, a lot of banks/bankers will not take them resulting in a shortage of such services and much higher costs for those which are provided.

Of course, if we want to address problems in this manner, we should also:

1. make politicians personally accountable for running deficits
2. make users of products personally responsible for the externalities (like pollution) involved in producing the products
etc etc etc

 

[Gone4Good]

I believe Bob Corker has, or at least plans, an amendment to the financial reform bill that would "clawback" 5-years compensation from any senior executive of a firm that needed taxpayer money to be resolved.

It's a good idea. It should be incorporated into law. With the state of populist outrage at the banks, I can't imagine who'd vote against that amendment.

 

[samclem]

So, many people here seem to agree that we want the investment banks to take risks and innovate, but we don't want them to take excessive risks, and especially not with taxpayer money.

It seems the problem is of our own making, and the solution is straightforward--don't offer taxpayer guarantees to the banks, to their creditors, and to their shareholders. There--the risk is right where it belongs, with the people hoping to make money and in a position to judge the risks. That's better than sending taxpayers in West Virginia a bill for the "good ideas" hatched in a New York boardroom.

Re: 5 year clawback of executive pay: It feels good, and it won't hurt. But it won't increase the caution of senior executives. In a competitive industry, if other firms are taking risks and making money, then there's a good likelihood you'll lose your very high-paying job in the only industry you know if you don't do the same. And what are the chances, really, that a perfect storm will recur and cause your firm to need a bailout? The smart thing is to keep rolling those bones and raking in the giant money. What focuses the mind of all the players (not just the execs, but everyone) is realizing that they are high up and without any net.

 

[harley]

So, many people here seem to agree that we want the investment banks to take risks and innovate, but we don't want them to take excessive risks, and especially not with taxpayer money.

Actually, I have no real need for investment banks to take risks and innovate. I sort of think they should do mergers, acquisitions, etc, with no real need to play fast and loose with the rules of GAAP. They should be able to make a decent living for themselves with the markup on the securities and investments they broker.

Other than that, I agree with your statement about not offering the bailouts. And I would love to see the upper management of most companies (not just investment banks) have some level of financial dependency on the long term success of the business they run. The issue for me is the short term reward with no thought for the overall good of the business for the shareholders.

 

[chinaco]

So, many people here seem to agree that we want the investment banks to take risks and innovate, but we don't want them to take excessive risks, and especially not with taxpayer money.

...

I would add to that statement... and will not long be allowed to take repeated advantage of the markets and investors using gaps in the laws, regulations, and gaming the markets, through any investments (i.e., said innovations).

They made up a new game that no one understood and no one else had a view into except them. Then they place side bets with insider information.


They can innovate and create new markets and vehicles, but those innovations should be approved by the regulators and regulated. Plus they should not be able participate directly in those markets or investments by investing directly or indirectly (i.e, through a subsidiary).

The system and their behavior is not good for capitalism (creation of capital for businesses development) or for investors in general.

 

[Gone4Good]

Yup, count me on the side that says we've seen too much risk and "innovation" in our financial system. A better model is one that takes far less risk and innovates less too.

Which leads me to a question . . . can anyone identify any tangible benefit from any financial innovation created in the last 10 to 15 years? Paul Volker says that the ATM was the last useful innovation. (Interesting quote below).

The oft-stated benefits of CDO's, credit derivatives, etc. was that they not only decentralized risk but allowed firms to better manage their risks. None of that turned out to be true. Instead, it appears they did the exact opposite. Rather than spreading mortgage risk, securitization and synthetic products allowed banks to concentrate and leverage that risk. There is no question that this crisis would have been far, far less damaging had people not been able to sell the same bad mortgage multiple times.

No, I think a smaller, less risky, less "innovative" financial sector is just what the doctor ordered. Bankers should go back to working "bankers hours" making a respectable living doing very basic things. In that world our brilliant mathematician, physicists, and engineers will have to make their billions in the "real" economy by creating real innovation with real benefits for real people. And the way to get to that better world is to clamp down tightly on the leverage allowed in our financial system.

Paul Volker on financial innovation . . .

I found myself sitting next to one of the inventors of financial engineering. I didn't know him, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity.

Much to my surprise, he leaned over and whispered in my ear that it does nothing—and this was from a leader in the world of financial engineering. I asked him what it did do, and he said that it moves around the rents in the financial system—and besides, it's a lot of intellectual fun.

Now, I have no doubts that it moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.

 

[chinaco]

...
Which leads me to a question . . . can anyone identify any tangible benefit from any financial innovation created in the last 10 to 15 years?

...

Hedge Funds, Private Equity, & Investment Banks (that did not throw all caution to the wind and survived) made a bundle. They had a tangible benefit!

Scoreboard:

• Hedge Funds, Private Equity, & Investment Banks - positive zillion$
• Average American's (and their IRAs, 401ks, and additional tax burden) - negative zillion$

Investment banks have turned into hedge funds (with inside knowledge).

http://www.fool.com/investing/general/2010/04/30/theres-an-idiot-in-every-trade.aspx

 

[yakers]

Add me to the list of folks who don't think we need 'weapons of mass financial destruction'. Its OK for some jobs, like baking to be boring. Not wasting the talent of CALTECH science grads to do 'financial engineering'.

 

[Texas Proud]

One of the problems that IMO people do not address is there were NO IMPLICIT GUARANTEES IN PLACE for a lot of the firms that got them...

Now think about that... the people at Goldman, AIG, GM, Chrysler and a good number of other firms did not have any idea that they would get 'bailed out'... and the investors did not think they would either... what happened is that the gvmt thought that the economy would suffer a lot more IF they were not bailed out.. so now we have an expectation that if this happens again there will be bailouts... you can pass any kind of law you want, but that expectation will not go away.. if the perfect storm comes again... I don't care what laws are in place, the govmt will step in again and say it is for the good of the country....


Now, if Citi or BofA were in such bad shape... then the gvmt should have closed them down and sold them off in pieces... the same with FNMA and Freddie... GM, AIG, etc. should not have gotten all the money they got... but suffered through BK like any other business that can not pay their bills... I think the long run business environment would have been better...


Any laws passed will not matter to the people who cheated... like WAMU and a few others who did the liar loans and such... IMO these were against the current laws and someone should be prosecuted...

I do not have any problems with some of the suggestions... get higher capital ratios... make sure the bondholders know they might own the company if there is a problem (but, that is also a known in BK...so nothing new there)... claw back bonus can be OK, but what about all the people at AIG who were not involved with the one unit that was bad... should people high up in the life insurance group suffer because 'the other guy' cheated

To me, this sound like SOX... a lot of bluster with no real change... and a lot of costs to companies with no real benefits... why has not one person not been charged with a crime under SOX

 

[FUEGO]

Which leads me to a question . . . can anyone identify any tangible benefit from any financial innovation created in the last 10 to 15 years?

ETF's?

I think the SPDR "SPY" was the first. Introduced maybe early 1990's? Slightly outside the 15 year period you are asking about.

 

[dex]

ETF's?

I think the SPDR "SPY" was the first. Introduced maybe early 1990's? Slightly outside the 15 year period you are asking about.

A reverse mortgage is a derivative.

 

[FinanceDude]

A reverse mortgage is a derivative.

Quit being logical...........

 

[harley]

OK, name one that hasn't been turned around into a cash generating machine for the financial industry to the detriment of the general public.

 

[Texas Proud]

OK, name one that hasn't been turned around into a cash generating machine for the financial industry to the detriment of the general public.

I don't understand... name one what

 

[harley]

I don't understand... name one what

A tangible benefit from any financial innovation created in the last 10 to 15 years. That hasn't been turned around into a cash generating machine for the financial industry to the detriment of the general public.

 

[Gone4Good]

A reverse mortgage is a derivative.

No its not. It's a secured loan where the lender takes possession of the collateral at its termination.