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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: combjelly who wrote (545869)	1/24/2010 1:21:50 PM
From: bentway	Read Replies (1) \| Respond to of 1578105

"If they lose, they might get fired." If they lose so big they might fail, they'll be bailed out. Imagine what you'd attempt, the risks you'd take on, if you KNEW the government of either party would step in and make you whole again if you failed! Which is why TBTF entity's MUST be broken up.

To: combjelly who wrote (545869)	1/24/2010 2:09:47 PM
From: tejek	Respond to of 1578105

"At least for the banks that where not bailed out, or that have paid back the bailout, their bonus is none of the government's business, and none of yours (unless your a shareholder)." In general, this is true. However, these people have the ability to crater the world economy. Which they came close to doing. A basic problem is that there are no curbs on their risk-taking, and plenty of incentives to take big risks. If they win, they get huge bonuses. If they lose, they might get fired. And if that happens, they almost certainly get hired by someone else to gamble. This is a situation that pretty much guarantees periodic global financial collapse. And that makes their bonuses my business. Taking big risks becomes almost a necessity. Banking the old, conservative way would not generate the kind of profits that would allow for large bonuses.

To: combjelly who wrote (545869)	1/25/2010 11:29:57 AM
From: TimF	Respond to of 1578105

They have the ability to bring on a severe recession, but curbs on pay are unlikely to do anything about that. A lot of the aspects of bubbles aren't things that lend themselves well to regulation, but if you want to contain the damage, better regulation in terms of how much leverage they are allowed (the companies that where allowed 50 to 1 leverage didn't fare well when things went bad), and how different types of holdings are counted in terms of reserve requirements (don't give complex bundles of securities much better treatment). Don't push banks to lower lending requirements (in the wrong circumstances they are all to willing to do that themselves at least if they haven't had a crash withing a decade to a generation, but pushing them just makes it more likely), and minimize bailouts reducing moral hazard. Pay is a minor factor at most. Also its hard to regulate, people can be compensated in so many different ways, unless your really going to put a regulatory straight jacket on the industry (which would tend to push the industry elsewhere, and would be negative even if it didn't) they will find a way to get compensated, previous "reforms" have usually wound up putting upward pressure on compensation. ------------- Did the structure of banker pay cause the crisis? This is an old topic but it is in the headlines again, so I pass this along, from Jeff Friedman: This “executive compensation” theory of the crisis is now the keystone of the conventional wisdom, having been embraced by President Obama, the leaders of France and Germany, and virtually the entire financial press. But if anyone has evidence for the executive-compensation thesis, they have yet to produce it. It’s a great theory. It “makes sense”—we all know how greedy bankers are! But is it true? The evidence that has been produced suggests that it is false. For one thing, bankers were often compensated in stock as well as with bonuses, and the value of this stock was wiped out because of the investments in question. Richard Fuld of Lehman Brothers lost $1 billion this way; Sanford Weill of Citigroup lost half that amount. A study by René Stulz and Rüdiger Fahlenbrach[3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking. Journalists’ and insiders’ books about individual banks[4] bear out this hypothesis: At Bear Stearns and Lehman Brothers, for example, the decision makers did not recognize the risks until it was too late, despite their personal investments in the banks’ stock. The Stulz and Fahlenbrach abstract reads as follows: We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis. It's entirely fair to argue that these tests are not decisive. But still, the evidence isn't there -- at least not yet -- that executive pay was in fact the big problem. I thank Jeff Friedman for the pointer. Posted by Tyler Cowen on September 21, 2009 marginalrevolution.com