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« Forbes: Lehman and Meritocracy | Main | Marketplace Radio: Reform won't change Wall Street pay »

September 23, 2009



Once the banks decided to accept taxpayer money (TARP) then they need to accept the will of the government shareholder, the taxpayer. The taxpayer sees that these banks that took the bailout are compensating people far, far in excess of their (the taxpayer's) own salaries.

So, limit the compensation which is the will of the government shareholder and let the Andrew Halls of the world leave their current institution and start up new firms, just as they do in the rest of industry.

Not only were the banks leverage 20 and even 30 times but that leverage was backed by short term loans that were renewed on a day-to-day basis. Bear Sterns went under because JP Morgan refused to continue with these loans. Lehman went under because JP Morgan and Bank of America refused to continue with these loans.

Senior management at these banks made no effort to truly understand the mortgage backed securities nor did they realize they were funding a housing bubble with the rise in the cost of housing far exceeding the rise in salaries needed to fund the increased costs of housing. The bubble was also caused by artifically low federal reserve interest rates which were bound to increase.


There's a lot of smart people with smart ideas out there, and certainly a lot of people will come up with similar ideas, and I'm just a regular dude, but still kinda cool that my (honestly self-generated!) idea (that I sent to the SEC "suggestion box" July09) is now put forth by a Wall Street Big Dog in the WSJ!...

"Charge 'Systemic Risk Insurance' premiums to all firms of a certain size. Let's face it, each and every time Wall Street creates a crisis, the Fed has and always will come to the rescue to some degree or another. Even though it may be revolting to "bail out" these risk-takers, it's better than what is often the likely alternative: systemic breakdown that will have adverse affect on Main Street. Armed with the data listed it the items above (derivative and leverage exposure), the Fed can charge insurance premiums to firms based on sophisticated (non-Gaussian, fractal-mathematics-based) models that can generate what-if scenarios to estimate (at least give an idea, rounded up to err on the side of caution!) the cost to the taxpayer to fix a mess caused by their derivative and leverage exposure. First, this would create a fund similar to the FDIC, SIPC, and PBGC [for banks, broker/dealers, and pension trusts, respectively], so that this fund would be the first line of defense instead of hitting up the taxpayer. Second, and more importantly, as these insurance premiums would be a drag on profits, it would incentivize firms to better manage risk, and not take increasingly extraordinary risks as the cost of "risk insurance" would raise accordingly."

Tino Argimon

The proposition that pay controls are won't do the trick is on point. It's a populist, populace-pleasing attempt to control greed. Indeed, controling leverage is the best and only way to avoid - or at least minimize - this kind of mess. Capital rules are the essential defining parameters of the sand box, and that's all you can define. One can't dictate how "the kids will play in the sand box", all one can do is make sure the sand box is as safe as possible for them, but kids will be kids, and if they have unlimited access to leverage, they will use it to excess. That is proven through the millenary history of finance. It isn't insane that Dick Fuld could make $30M a year or whatever while we all watched Lehman go down the tubes - what is insane is that Fuld had nothing or no one telling him "thou shall raise capital, no if's, and's or but's, or else we're taking you over." And the capital raise should have taken place not in response to a crisis situation having been reached - it should have happened when LB was at 60, then at 50, the 40 and so on, rather than those guys continue to say "oh we'll make it on our own, we've been through this before" etc etc. So there - it's the leverage drug that must be curtailed from the junkies, they will go through fits of withdrawal in the adaptation process, violent convulsions, they will try to find new ways to access the drug, and here's where regulation needs to make sure we have air-tight capital rules.


Obama has a problem on his hands. 180 billion to bail out AIG and pay it's counterparties 100 cents on the dollar so that they can continue to knock the cover off the ball. I love the idea of him explaining to the American taxpayer that leverage, not risk was the reason we needed to bail these firms out so they could lavish themselves with huge bonuses.

Roger H

Worth looking at:
(pay and benefits disparity between government/public education and those who work in the private sector,)

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