Tuesday, March 18, 2008

What reforms are required?

I agree with the points in this article, especially in regards to the feeling of this being a historical moment. In the position I'm currently in—forced by circumstances to sell my house at this time (it's nothing tragic, my wife got a job in St. Louis and we're moving there from southern California) and working for a public company neck deep in the subprime mortgage crisis—I'm feeling pretty exposed to the financial and economic winds blowing around.

I remember a few times like this before. The dot-com crash, which I was also exposed to in the software industry, although my dot-com era start-up had been bought out by a more established company prior to the crash. I did end up getting laid off, though. The various crises of the '90s like the peso crash and Asian currency crisis were also historical, although these didn't really stir the relatively provincial consciousness of the American public to a great extent. I think that the Clinton administration and international institutions managed the '90s crises pretty well and, all things considered, the recovery from the dot-com crash was well managed (although there's a convincing case that the crisis was merely pushed off through making money easily available and leading directly to today's credit crunch).

All of that said...

When I try to think about what sorts of reforms are required to prevent this sort of problem in the first place, I keep coming back to the most perplexing issue of this whole time. Why are those who have been the primary authors of this current disaster—the CEOs and chairmen, the high-flying executives with salaries and benefits that would make Midas blush, the "smartest guys in the room" who are concocting and institutionalizing these exotic financial instruments that would considered immoral and unethical if concocted in a virus laboratory—why do they seem to be the only ones who are assured of coming out unscathed in the end? Why are they the ones who must be rescued from the perdition of moral accountability, primarily because we need their superhuman analytical and leadership abilities to get us out of the mess that they made in the first place??

So my next obvious complaint is to blame those people, right? Well, to some extent, yes, they're morally and ethically culpable for their failures. Japanese feudal culture may have been messed up in a lot of ways, but a person took responsibility for his or her fuck-ups, you have to give them that. At the same time, it's simply human nature: get what you can and cover your ass along the way. Yeah, there's art and why are people altruistic and all of these questions, and I have a generally sunny assessment of most people's intentions. But I think that people try to work towards what motivates and inspires them. So it shouldn't be surprising that business people are willing to do whatever it takes to succeed at business and business is all about getting paid. And you can't deny that these people are gettin' paid.

That irritating parable about the frog and scorpion is now invoked.

But CEOs and chairmen of the board don't have the capacity to hire and fire themselves, nor do they have the capacity to negotiate their own contracts? So why do all of the contracts seem to read like that?

The composition of the boards of directors of publicly traded companies must be forced to be more open. I don't really know what this means. I know at the very least that shareholders must receive a lot more control over the composition of the board. There are huge questions today about the propriety of the deal selling Bear Stearns to JP Morgan, including the possibility that the executive staff at Bear Stearns were covering themselves from criminal or civil liability or trying to procure greater financial benefits for themselves at the expense of the shareholders. If the executive staff felt more at risk if the company failed, they would then be more likely to protect the interests of the shareholders precisely because those interests would parallel each other.

Anyways, I'm going to research this topic over the next few days. From what I know of the current structure, it incentivizes risks and completely defangs failure as an offsetting punishment. If there's only upside and no downside for the people running financial institutions, we're going to see more Bears Stearns, more S&L crises, more dot-com crashes, and so on. It's no way to run a railroad.

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