|
Korean Job Discussion Forums
"The Internet's Meeting Place for ESL/EFL Teachers from Around the World!"
|
| View previous topic :: View next topic |
| Author |
Message |
thepeel
Joined: 08 Aug 2004
|
 Posted: Thu Jan 24, 2008 8:31 am Post subject: Capitalism's Enemies Within |
 |
|
| Quote: |
Amid the mayhem on world financial markets, it is becoming clear that capitalism's most dangerous enemies are capitalists. No one can have watched the "subprime mortgage" debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs -- and they left with multimillion-dollar pay packages. Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.
Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It's not as if these CEOs weren't compensated in all those years. If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy.
Wall Street's pay practices perversely encourage extreme risk-taking that can destabilize the economy. Subprime mortgage losses may simply be chapter one. Now there are signs of problems involving securities known as "credit default swaps." Never mind the details. Concentrate on the possible fallout. If banks and investment houses sustain more losses, the nation's credit system will be further wounded and so will the economy. The Federal Reserve cut its key overnight interest rate yesterday from 4.25 percent to 3.5 percent -- a huge move -- in part to shore up this wobbly credit system.
By "Wall Street," I mean all the commercial banks, investment banks, mutual funds, hedge funds and the like that comprise the financial sector -- but particularly investment banks. Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. But pay is also heavily skewed toward annual "bonuses" based on the profits that traders and bankers generate. I asked Johnson Associates, a compensation consulting firm, for typical Wall Street pay packages. The results describe "managing directors" based in New York with 10 or 15 years experience. Most would be in their 40s.
Here are estimates for 2007:
# Investment banker: $2.1 million, consisting of $275,000 in base pay plus $1.2 million in cash bonus and $625,000 in long-term bonus. (An investment banker helps firms raise capital by selling new stocks and bonds and also advises on mergers and acquisitions.)
# Bond trader: $1.5 million, with $240,000 in base pay, $975,000 in cash bonus and $310,000 in long-term bonus.
# Hedge fund manager: $1.8 million, split between a salary of $265,000 and $1.5 million bonus.
Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I've never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable. True, Wall Street often performs a vital function. It channels savings into productive investments. It helps provide access to capital and credit. In 2006, U.S. companies raised nearly $4 trillion through new stocks and bonds. Many financial innovations, including mortgage-backed securities, have benefited individuals and companies.
But Wall Street also frequently misallocates capital and credit. The "tech bubble" of the late 1990s was one episode. Now we have subprime mortgages. Why? Well, the herd mentality of financial crazes has a long history. But compensation practices skewed so heavily toward bonuses based on annual profits make matters worse.
"People self-select for careers. On Wall Street, they self-select for the money," says pay consultant Alan Johnson. "Wall Street is a sales business -- they sell bonds, securities, transactions, ideas. . . . They're not paid to be long-term, philosophical, reflective." The pressure is to do the next merger, sell more stocks and bonds, do more trading -- whatever boosts current profits and bonuses, the long-term consequences be damned.
"These are my MBA students, not just mine but MBAs from Harvard, Stanford, Pennsylvania," says economist Allan Meltzer of Carnegie-Mellon University. "They were buying and selling this garbage [subprime mortgage securities]. Are they so stupid? They got compensated for doing it. If they didn't do it, they'd lose their jobs."
To be fair, the real estate bubble had many causes, including low interest rates, the political popularity of homeownership and the (mistaken) belief that housing prices could never fall. This may explain why, so far, the backlash against Wall Street has been muted.
But if the subprime failure turns out to be a preamble to a larger financial breakdown, flowing from the creation of new securities that offered short-term trading possibilities but whose long-run risks were underestimated, then the mood could turn uglier. Indeed, many Americans may conclude that capitalism has run amok. |
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/22/AR2008012202615.html?hpid=opinionsbox1 |
|
| Back to top |
|
 |
Pluto
Joined: 19 Dec 2006
|
| Posted: Thu Jan 24, 2008 8:50 am Post subject: |
|
|
Managers are under pressure to maximize the value of the firm, or to put another way to increase economic profit. Sometimes if you're the manager you might find it advantageous to buy out another firm and increase that firm's profit to get a good ROI. Of course, if you're the manger who got bought out, well, tough $hit; you should have done a better job to increase the value of said firm.
As for the compensation of the severance pay these C-level managers are getting. They may not be as smart as engineers or doctors per se, but they do know how negotiate, as in negotiate their surrender. At least this is my understanding of why these managers are leaving with absurdly high comp packages. |
|
| Back to top |
|
|
thepeel
Joined: 08 Aug 2004
|
| Posted: Thu Jan 24, 2008 9:07 am Post subject: |
|
|
They are essentially the middle men of credit. The Fed creates it and the banks deal with it. These guys make million and have created massive instability. I'm no class warrior, and indeed I'm moving into a trading position shortly, but the incentives are all messed up.
Martin Wolf had a great idea about how to alter the incentives:
http://www.ft.com/cms/s/0/73a891b4-c38d-11dc-b083-0000779fd2ac.html
| Quote: |
You really don�t like bankers, do you?� The question, asked by a former banker I met last week, set me back. �Not at all,� I replied. �Some of my best friends are bankers.� While true, it was not the whole truth. I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility. Worse, they are irresponsible partly because they know they are necessary.
My attitude to the banking industry is not a prejudice. It is a �postjudice�. My first experience with out-of-control banking was when I watched the irresponsible lending that led to the devastating developing-country debt crises of the 1980s.
The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system � on most counts, the world�s most sophisticated � four times during the same period: from the developing country debt and �savings and loan� crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitised-credit crisis of 2007-08.
No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials � particularly, central bankers � fail to come at once to their rescue when they get into (well-deserved) trouble.
Yet they are right to expect rescue. They know that as long as they make the same mistakes together � as �sound bankers� do � the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.
It is the nature of limited liability businesses to create conflicts of interest � between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far harder to manage than in any other industry.
That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world�s most sophisticated financial system demonstrates that.
I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important � the political legitimacy of the market economy itself � across the globe. So it is time to start thinking radical thoughts about how to fix the problems.
Up to now the main official effort has been to combine support with regulation: capital ratios, risk-management systems and so forth. I myself argued for higher capital requirements. Yet there are obvious difficulties with all these efforts: it is child�s play for brilliant and motivated insiders to game such regulation for their benefit.
So what are the alternatives? Many market liberals would prefer to leave the financial sector to the rigours of the free market. Alas, the evidence of history is clear: we, the public, are unable to live with the consequences.
An alternative suggestion is �narrow banking� combined with an unregulated (and unprotected) financial system. Narrow banks would invest in government securities, run the payment system and offer safe deposits to the public. The drawback of this ostensibly attractive idea is obvious: what is unregulated is likely to turn out to be dangerous, whereupon governments would be dragged back into the mess.
No, the only way to deal with this challenge is to address the incentives head on and, as Raghuram Rajan, former chief economist of the International Monetary Fund, argued in a brilliant article last week (�Bankers� pay is deeply flawed�, FT, January 9 2008), the central conflict is between the employees (above all, management) and everybody else. By paying huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible, banks create gigantic incentives to disguise risk-taking as value-creation.
We would be better off with Jupiter�s 12-year �year�, since it takes about that long to know how profitable strategies have been. The point is that a year is an astronomical, not an economic, phenomenon (as it once was, when harvests were decisive). So we must ensure that a substantial part of pay is better aligned to the realities of the business: that is, is made in restricted stock redeemable over a run of years (ideally, as many as 10).
Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.
The big points here are, first, we cannot pretend that the way the financial system behaves is not a matter of public interest � just look at what is happening in the US and UK today; and, second, if the problem is to be fixed, incentives for decision-makers have to be better aligned with the outcomes.
The further question is how far that regulatory net should stretch. I believe it should cover all systemically important financial institutions. Drawing the line will not be simple, but that is a problem with all regulation. It is not insoluble. The question the authorities need to ask themselves is simple: if a specific institution fell into substantial difficulty would they have to intervene?
If the conflict of interest that dominates all others is between employees and everybody else, then it must be fixed. All bonuses and a portion of salary for top managers should be paid in restricted stock, redeemable in instalments over, say, 10 years or, if regulators are feeling generous, five. I understand that the bankers will not like this. Yet one thing is surely now quite clear: just as war is too important to be left to generals, banking is too important to be left to bankers, however much one may like them. |
Directing large portions of bankers/traders pay long-term dependent bonuses would likely alter the incentives from short-term rent-seeking to a more longer-term perspective. I think it is an excellent idea. |
|
| Back to top |
|
|
ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
|
| Posted: Thu Jan 24, 2008 9:07 am Post subject: |
|
|
These bubbles, meltdowns, recessions and the coming worldwide financial collapse COULD NOT happen if we had honest money based on gold, no taxes on income or property and deregulated the economy.
Today's problems are not the result of the free market but of socialism.
It is one of the perverse outcomes of massive government and the socialistically regulated economy that "clever" but slippery manipulators can use the government (think lawyers like Sen. Edwards) to milk the innocent: mostly masses of people who swallow the government's lies whole without thinking along with the pseodo intellectuals who believe them religiously, worshiping at the altar of their god, the socialistic state(think yata boy).
After the government's next round of failures, these religiously confirmed socialist supporters and government lickspittles will whip up their dogma into a new frenzy in a call for even greater government size, taxation, regulation and control, blindly ignoring that it has been growing incessantly since 1913 and that it is the government and its programs that cause all of our problems. |
|
| Back to top |
|
|
Pluto
Joined: 19 Dec 2006
|
| Posted: Thu Jan 24, 2008 11:41 am Post subject: |
|
|
| thepeel wrote: |
Directing large portions of bankers/traders pay long-term dependent bonuses would likely alter the incentives from short-term rent-seeking to a more longer-term perspective. I think it is an excellent idea. |
I agree, to a certain extent, that Bernanke and the Fed's rate cut have given cover to these banks. I also worry that these subsidies will only give incentives to the private bank chiefs to make the same mistake again.
Then again, something like this is easy for me to say as I own absolutely no debt. So when I hear people like Jim Kramer, who I actually have a lot of respect for, screaming about empty houses in San Berdino CA, I just shrug my shoulders and say 'not my problem.'
Although I really wish the Fed would just let the market correct itself. The lenders who made the high risk loans have made their bed and should lie in it; the Fed is not responsible. |
|
| Back to top |
|
|
Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
|
| Posted: Thu Jan 24, 2008 1:00 pm Post subject: |
|
|
| Quote: |
(think yata boy).
...it is the government and its programs that cause all of our problems. |
 Tell me again. I've forgotten. WHO has been drinking the Kool-Aid? |
|
| Back to top |
|
|
ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
|
| Posted: Fri Jan 25, 2008 6:29 am Post subject: |
|
|
A little economics lesson for Yata:
(The US govt is bankrupt. The Kleptocrats' national health care plans are impossible to fund. Comptroller of the US interview.)
http://www.youtube.com/watch?v=I-16u9x3tfE&feature=bzb302
| Ya-ta Boy wrote: |
| Quote: |
(think yata boy).
...it is the government and its programs that cause all of our problems. |
Tell me again. I've forgotten. WHO has been drinking the Kool-Aid? |
The first thing that happens after drinking the Kool-Aid, Yata, is that you forget you've done it.
Don't worry, we all know that you drank it, so we'll keep reminding you. |
|
| Back to top |
|
|
|
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
|
|
FAQ
Search
Memberlist
Usergroups
Register
Profile
Log in to check your private messages
Log in
