2008 September 21 Sunday
How About Rolling Heads For Sales Of Securities To Treasury?
Modest proposal: Hank Paulson's proposed fund for buying up toxic securities should have a rule: The CEO of any financial institution that wants to sell to that fund should resign his position. A new CEO should do the actual selling of the securities.
People should pay with their jobs for the financial disaster which they've helped to create.
Also, Congress should make Barney Frank and Chris Dodd resign for protecting Fannie Mae and Freddie Mac for years. Again, I want accountability for mistakes.
Stephen, I have to agree with you now. I think Paulson at Treasury is going too far at $700 billion. I was willing to see a little bail out but this is too much and has crossed the line. we cannot solve a debt problem with more debt and they now risk US solvency. If banks have to fail, so be it.
Thai, I think this is just the beginning - there's talk of the $700 billion being a low-ball "introductory" amount. Some say there'll be subsequent handouts ultimately reaching $1.5 trillion.
The probability is high that the government will write more cheques because its now caught both ways - it either keeps writing cheques to re-inflate the housing bubble and thereby stop defaults, or it lets the bubble deflate and pays for all of the resultant delinquent mortgages. The net result is that the government must encourage more buyers into the housing market by making lending a zero risk proposition. This defers the ultimate reckoning at the cost of ensuring that when that day comes it will be much worse than it would have been had the government not gotten involved in the first place.
I doubt rolling heads would make much of a difference. The major decision makers at any of these institutions gets primarily compensated by equity. It is far better for them personally to take major risks with their companies that have consequences a couple years away than to not take them because they will get higher short-term gain from taking those risks. It's difficult to break the corporate wall and post-hoc sue the execs as well. I don't see how to correct this other than
1. having rules that can prevent executives from taking these risks (unfortunately each generation finds a new unforeseen one)
2. have compensation mechanisms that tie the executives to drastically deferred vesting from what is the practice today.
It was clear to everyone years ago that this was an totally irrational bubble in housing equity. One didn't have to look much further than the rent vs own cost spread which has been seriously out-of-whack for a while. It's still shocking that all those smart people in skyscrapers in Manhattan can't seem to prevent the collective sheer lunacy. The sad fact is that even though most of those smart people are decent hard working people, collectively they are behaving little better than an uncle with a gambling problem. Being an engineer growing up in the midwest, I always marveled at how I could have middle-class coupon-clipping neighbors that managed the state employee retirement fund managing as much money as the big-shot fund managers on wall street and actually deliver the same (or usually better) returns. Not to sound like a commie or anything, but I'm just suspicious that the bookies on wall-street are making far too much money off of the technical class. The technical class is, after all, ultimately the ones mostly responsible for most of mankind's progress.
I personally moved the little money I have around to avoid this mess, especially in the area of purposely avoiding brokerage institutions and money markets that have real-estate SIV exposure. I did this knowing that I got 0.3% lower yields but I didn't want a liquidity (or worse) issue when there was a "bank run". I know we can't have money markets and brokerages fail because they've become modern banks and the FDIC laws haven't caught up, but not letting them fail causes a distortion where people like me don't get any real relative reward for having some foresight. Instead, I get the same 10% inflation rate eroding my hard-earned nest egg just like everyone else because Uncle Sam has to print money to get out of this mess. The silver lining is that a lower dollar combined with America's technical prowess will make it more lucrative to be an engineer in the future.
Let us hope that the soon-to-be-dismissed financial executives don't have their departure cushioned by juicy golden parachutes.