While I mostly agree with Nicole Gelinas premises, I strongly disagree with her conclusion. Had we let the banks “die and die hard”, we probably would not be debating this issue today. We would be too busy shooting each other over the last cans of tuna fish in this country.
DC had a set of bad choices in 2008 and decided to try and keep credit, the lifeblood of our economy, somewhat flowing. I believe that they did about 60% of what needed to be done. More work needs to be done, especially in the swap, reinsurance, derivative, and hedge fund area. I would really like to see the largest financial firms get broken up into smaller business segments and truly get the depository institutions out of the risk business period.
Sooner or later, some od these greedy bastards are going think they are smarter than they actually are and this problem will come about again. The big question at that point is whether the US government, already starting to lose its luster as the “ultimate safest borrower”, will actually have the ability to effectively intervene next time.
Critical reforms needed:
Return to Glass Steagall. Reinstate the wall between commercial banks and securities firms. Banks should not be speculating with depositor money.
Make the executives responsible for the decision making leading up to a liquidity crisis at a financial institution feel financial pain for their bad decisions in the event of bankruptcy or government bailout. If a bank files for bankruptcy or requests government assistance, minimally the top 3 layers of executive management should be required to immediately refund the prior three years of bonus and stock incentives received as well as surrender all unexercised stock options. In addition, those executives should be ineligible to receive bonus or incentive compensation from any public institution for 5 years into the future nor an increase in base compensation greater than the CPI.
To begin instilling a sense of accountability and personal responsibility in all layers of management, managers and executives below the top tiers should also be required to refund incentive payments from prior years and forego future incentive compensation. I would propose a 50% haircut on them for incentive compensation and equity exercises during the previous three years and ban them from receiving stock options or bonus payments from any publicly held company for the next three years.
Members of the boards of directors of a bank filing for bankruptcy protection or requesting government assistance should also be required to surrender all compensation (pay and equity) received the prior three years and any stock options granted. They should be fired, replaced and prohibited from serving on the board of any US corporation for a period of 5 years.
One of the great crimes of the 2008 bailout was the banks immediately returning to paying large bonuses and stock option grants to the same executives who went to the taxpayer with cup in hand. In the years immediately following the bailouts, their banks were being propped up by the taxpayer and Federal Reserve while they rebuilt their balance sheets and payed themselves large bonuses for “improved” performance. If executives are going to be handsomely rewarded in good times, they should also be penalized financially when they make poor choices.
True entrepreneurs in our system pay the ultimate penalty in the event of bankruptcy, they lose their personal net worth and jobs. It is time for professional management of financial firms to also have their personal financial fortunes more aligned to the consequences of the decisions they make. An executive who takes a high risk bet in today’s world may face loss of a bonus for a year or no consequences at all. If he takes risk, knowing he may be wiped out financially if the risk fails, he or she may become better at evaluating risks and will likely avoid risks that may bring down the company.
I’m in the die hard crowd. Had we allowed the process to work they would have declared bankruptcy. the court would have provided for administration of customer funds and creditors would have received their due. Instead between the GM and later MF Global debacles we have subverted the rules of contract and law and converted to a 100% pay to play mentality where the AG won’t even consider prosecution despite laws being broken.