Privitize Profit, Socialize Risk

[legion]

No matter your political leanings, I think I am in the majority when I say I am outraged by the rash of bailouts of big businesses going on.

CEOs are supposedly paid the big bucks because there job has much higher risk than a line employee. The reality is that they have nearly eliminated any personal risk with employment contracts that all but prevent their firing, and ensure a large payout if they are fired. (Ironically enough, this practice started only after Congress passed a law mandated that executive compensation be made public. It ignited a pissing contest that has gone one for more than 20 years. It also spawned a whole industry of "executive compensation experts".) The "too big to fail doctrine" and the demonstrated commitment by the Federal Government to bail out any large company that meets with difficulty has all but eliminated the public risk (to the large corporation) of a CEO's actions.

So why are they still paid so well? There is very little real risk left in running a large corporation anymore.

It is tempting to pass a law limiting executive compensation, but I don't think that is a real solution. What makes America great is the ability to reap the rewards of a great idea, as well as to accept the risks when your idea does not take off. No, I think the real solution is to let companies fail, take our lumps, and come back stronger with the lessons we have learned. But we have chosen a third path. We allow panic mergers and whole industries are consolidated under a smaller number of bigger and bigger players--so that the next round of bad decisions will affect an even greater number of people. We allow executives to be well compensated, but we have removed nearly any downside to being an executive. No lessons have been learned, excepting that the government will cover any mistakes made by big corporations.

[HardDrive]

+1

[tabs]

Most CEO's are experts at being non descript people eg knowing how to brown nose and or work a bureaucratic system. Talent hmm...guess we know how really talented these people are by the pure genius almost brought the whole fking system down.

Problem is that the leadership in these corporations basically never thought in their wildest dreams that anything could go so wrong so fast. They were inured to the risk of a systematic failure of the system. Why were they caught being out to lunch, because they have never experienced anything but the good times of a system running smoothly. In other words they never went through a Great Depression, that would have made them wary of taking on too much risk. Just call those people the BOOMERS.

[legion]

Interesting.

Now the Democrats are insisting that there be "strings attached" to the bailout package regarding executive pay. I think this is a positive step, but I also think the whole bailout package is the wrong thing to do.

Honestly, I'd like to see strings attached anytime the government hands out money, to anyone.

[jyl]

I consider "outrage" a popular but not very useful emotion. It gets in the way of thinking.

[Jim Richards]

Originally Posted by legion

No matter your political leanings, I think I am in the majority when I say I am outraged by the rash of bailouts of big businesses going on.

Abso-freakin'-lutely!!!

[Jim Richards]

Originally Posted by jyl

I consider "outrage" a popular but not very useful emotion. It gets in the way of thinking.

Yes. But clearer thinking, IMO, means that someone needs to personally suffer for this and it should be the risk takers.

[Rick Lee]

I'd be pretty hot if taxpayer money goes to pay CEOs' departing bonuses. But I don't know why they should have any less right to seel their stock or exercise their options than anyone else. As long as I'm not a shareholder and they ain't getting taxpayer money, I really don't care what they earn. Capping it would set a very dangerous precedent and not fix a single problem. It would, however, make some class warfare folks feel better about themselves.

[nostatic]

I kinda like the Chinese approach to this sort of thing. If a major financial company there were to fail this big, the CEO and perhaps other top officers would "commit suicide."

At the very least the CEOs should be on some sort of financial hook. If a small business owner goes belly up they lose their house. These places go belly up and the CEOs lose what of their personal assets?

[widebody911]

In 2007, Wall Street’s five biggest firms — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley — paid a record $39 billion in bonuses to themselves.

That’s $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.

Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines — their worst year since 2002.

[Jim Richards]

Rick thinks that it's class hatin' for you to bring this up, Thom.

[Superman]

Perhaps we have found some common ground. I am sick and tired of this theory that we must sacrifice to protect the interests and profits of corporations, so that they will prosper and return those sacrifices to us many-fold. It is a circular argument that, sure, has some merit.....but gets taken to an asinine extreme in America. It's all about the money and the profits here. And again, we should support and suffer for that because in the long run our coddling of 'industry' and 'commerce' protects us an makes us (citizens, humans, Americans) secure and prosperous.

This trillion-dollar bailout is one of the very most offensive bits of legislation I have ever seen. Yeah, I know that citizens/Americans stand to benefit. In theory. And I dismiss that. Even if it is true. This nation has become primarily a commercial enterprise, and that is inconsistent with my value structure. Sure, yeah, I have heard that the American commercial "furnace" is what keeps us all warm. And quite frankly, I would be happier, and America would be healthier and happier, if we fell into tenth place on this planet. Set the clock back a hundred years if need be. $10,000 per household is what we're talking about here. My answer is a loud "NO."

[Superman]

Let's make a deal with these companies. Let's loan them the trillion dollars and, until the debt is fully paid off, let's redirect all those companies profits into the United Stated Treasury. Let's buy the fukkers, and have the United States of America become a 'player' in the game. Instead of being a lender and a "mommy" when they are in dire straits. If commerce is so valuable, and so necessary, and so vital to our security and prosperity, then how 'bout America becoming a player instead of a bailout purse.

[BlueSkyJaunte]

Originally Posted by jyl

I consider "outrage" a popular but not very useful emotion. It gets in the way of thinking.

If you actually thought about the situation that's going on right now you'd be outraged too.

[jyl]

Originally Posted by Jim Richards

Yes. But clearer thinking, IMO, means that someone needs to personally suffer for this and it should be the risk takers.

Here is my thinking.

First, ignore one's political leanings, they are irrelevant. Second, tone down our Sunday-school notions of fair and right, we are trying to solve a practical problem here. Third, control our emotions, getting all teary-eyed and hysterical with outrage is not a solution.

The practical problem is financial system is caught in negative feedback loop of declining asset values -> bank balance sheet writedowns -> shrinking bank capital -> contracting bank lending -> slowing economic activity -> declining asset values -> etc.

Plus, as the loop continues, increasing risk of a sudden event that could short-circuit this loop and send us directly to "GO" - or in this case "STOP"..

Is the ultimate destination, if we spiral all the way down the loop, a tolerable one? I think that ultimate destination is a very severe recession or a depression and I can't think of any way to make that tolerable. We're talking the 1930s.

So we need to break the loop, or at least try like hell.

Look at the pieces of the loop, where can govt intervene to break the chain?

Paulson/Bernanke are aiming at the link "declining asset value -> bank balance sheet writedowns", they want to take enough of the deteriorating assets off banks' hands to stablize those balance sheets.

They are also aiming at the link "bank balance sheet writedowns -> shrinking bank capital", they want to add some govt capital via the asset purchases, and clear the way for private investors to add more capital.

Now, look at the various punitive measures that all the "outraged" people want, and decide if they interfere with these attempt to break the loop.

Some say don't use govt money for anything that would benefit the banks. Like the candidate says, "no more bailouts!"

OK, that basically means stand back and let us continue to spiral down. Hello, 1929. Thank you very much.

Some say govt should get equity stakes in any bank that participates in selling assets to Treasury.

Up to a point, that probably won't hurt. But if govt takes too much equity, then private money will not step in to contribute capital. Why should they? The US govt just took almost all of the equity.

Some say slash executive compensation at any bank that participates.

Again, up to a point that won't hurt, execs are in for a lean couple of years anyway. But if impose some arbitrary/permanent cap, then you basically steer talent away from the banking industry. We don't want US banking industry to be run by the dummies - we want it to be run by the smartest with the right incentives and regulatory constraints - the underlined part has been missing.

Some say require govt to get the best possible deal (pay bottom-dollar) for assets it buys.

Well, in that case might as well let the system collapse, watch the banks go BK and buy those assets from the bankruptcy trustee - which becomes pointless.

Get it? The value of these assets is not a fixed number - the value is dependent on actions of govt and private money. Suppose an MBS has a market value of 30 to 50 cents on the dollar today, depending on how desperate the seller is. If we let the spiral continue and return to 1929, then that MBS may become worth 10 cents. If we break the spiral, then it may be worth 70 cents. Paulson is saying, let me buy it, not necessarily for 30 cents, maybe for as much as 60 cents. If we do enough of that, and private money then steps in, then eventually we may get 70 cents for it.

"Someone has to personally suffer" you say.

Do you see a link in the negative feedback loop that is labeled "no one is personally suffering"? I don't. At this point, inflicting personal suffering is irrelevant to solving this problem. Maybe it is useful from a political standpoint, so that Joe "I have No Clue What Is Going On" Sixpack will be appeased.

[RPKESQ]

I would not support any of these bailouts without two conditions:

1) The management must suffer serious financial loss and penalties all the way down to middle management level. No exceptions. These greed based finacial decisions were as distructive to the US as any terroist action. I believe it was treasonous to sell America's future finacial security to line their pockets.

This financial penalty must also be placed on the buyers who made what is plainly stupid decisions as to overextending themselves with these garbage loans. Let them loose their houses, period. They should not be rewarded for being stupid.

2) The government must set standards for home loan parameters. Having 20% down payment from a verified asset sale or savings and a monthly loan payment of 25 - 30% of net income would have prevented this entire problem in the first place. Having a home you own is not a right in America. If you do not have the 20% and income, you don't have a home you own. You rent, period.

Without some level of standards this "funny" business will happened again.

[Jim Richards]

John, please do a risk-reward (4-quadrant) graph for the various players in the economy. Maybe start with the service workers and the blue collar laborers. Throw in salaried workers, the low and mid-level mangers, and top it off with executives and directors. IMO, the results will show more risk and less reward at the low and mid part of the food chain, and low risk and high reward at the high end of the food chain. That's not system that can support itself long-term. The high reward people need to have a corresponding level of risk.

[RWebb]

yup


btw, the FBI has begun an investigation into at least some of this

[jyl]

Originally Posted by Jim Richards

John, please do a risk-reward (4-quadrant) graph for the various players in the economy. Maybe start with the service workers and the blue collar laborers. Throw in salaried workers, the low and mid-level mangers, and top it off with executives and directors. IMO, the results will show more risk and less reward at the low and mid part of the food chain, and low risk and high reward at the high end of the food chain. That's not system that can support itself long-term. The high reward people need to have a corresponding level of risk.

First, in our capitalist country the top of the food chain is better off than the bottom of the food chain in almost every way. Including this risk-reward quadrant of yours. Sounds like a bigger reform job than just compensation in a specific industry.

Second, what the heck does this have to do with the immediate problem? You said it yourself, you're talking about a "long term" issue. We need to stabilize the financial system in the here and now, because we are seeing breakdowns at an accelerating rate - the spiral is accelerating.

Let's do our best to have merely a 1970's or 1980's or (would that we are so lucky) 1990's recession, instead of a 1930's experience. Then we can deal with all the social justice stuff.

You know, from reading my posts over the years, that I'm not a "let the rich get richer and screw the rest" kind of guy. I do have a conscience and social views. But right now, I'm a pragmatist.

[Jim Richards]

Sorry John. I just have no interest in subsidizing the low-risk high-reward folks. If they want a taxpayer-funded bailout, they are going to have to sacrifice for the privilege.