The Flaw in the System: The Bankers Don't Care About the Banks
Alan Greenspan says he is in a "state of shocked disbelief" that the concept of self-interest did not protect the banks from taking excessive risks and destroying themselves. But he, along with Tim Geithner and Larry Summers and many others, are missing the fundamental flaw in the system. The bankers don't care about the banks; they care about the bankers.
The enlightened self-interest of the bank executives has been separated from the interests of the banks they work for. In the 1970's, the banks were still privately owned. So, the guy up at the top wanted to protect his company, his interest and his money. If his executives took unwarranted risks with the boss's money, they were goners. But these days the people at the top of these companies don't own the companies. It's not their money.
Here is how the Wall Street Journal explains it (a useful nugget in an otherwise horrible piece):
"The Wall Street compensation system has evolved from the 1970s, when most of the firms were private partnerships, owned by partners who paid out a designated share of the firm's profits to nonpartner employees while dividing up the rest for themselves. The nonpartners had to earn their keep every year, but the partners' percentage ownerships in the firms were also reset every year or two. On the whole, everyone's performance was continuously evaluated and rewarded or penalized. The system provided great incentives to create profits, but also, because the partners' own money was involved, to avoid great risk."
These days, the way executives make money instead is in the form of bonuses for years where they bring in a lot of return (and often times for years they don't), but the threat of being fired for too much risk taking is minimal. The more risk you take, the more money everyone makes. And it's not the partner's money you're playing with anymore. You're playing with house money. No one is minding the store anymore.
Now think about it this way: if you were going to make ten million dollars in bonuses for taking high risks with other people's money, would you do it? The answer invariably is - hell yes!
If it's your own money on the line, you might be extraordinarily careful with the risk you take. But if you are going to get a multi-million dollar reward for taking risks, but you expose your company to a little bit more risk, what percentage of people would take that extra risk on behalf of their company? I would venture to guess 98%.
And the other 2% are suckers. There is no downside for you. The higher the risk, the higher the return in the short-run (which actually lasted a long time) and the higher your take home salary is. Are you going to be the only guy on Wall Street saying, "Well, golly gee willikers, everyone else is making millions but I really care about my shareholders. I don't want that huge bonus. I want safe investments for my company."? That's not how human nature works.
So, now we have Tim Geithner and the rest of Treasury working so hard to prop up not just these failed banks - but these failed bank executives - because we don't want government running these large companies. The self-interest of the market will do a better job of managing these companies. But it hasn't - because of this fundamental flaw.
These executives did not actually fail. They succeeded wildly. It's just that they had a different goal - to take home as much money as they possibly could for themselves. Mission accomplished!
I don't blame them. The system is set up wrong. Almost anyone in their position would have done the same - and will continue to do the same as long as we are foolish enough to keep pouring money into these companies. They are going to try to move every nickel they can from our pockets into theirs.
The Treasury plan is all wrong. We have to first acknowledge that the boards of these companies are not truly representing the shareholders. They are largely friends with most of the CEOs and they do not have an incentive to reign in out of control compensation for the top executives. Then those CEOs pass on the wrong incentives to the executives below them. The more risk they all take, the more money they take home. And if their company goes broke one day - who cares?
Most of these guys took home millions upon millions of dollars already for profits that never really existed. If the company goes under, okay the gravy train came to an end but they still have all the money they made from all those years. It's in their personal bank accounts. That's enlightened self-interest!
Do you know that last year, as Merrill Lynch was in its death throes, 696 executives got bonuses over a million dollars? 696! As the company lost tens of billions of dollars, the executives took home a combined $3.6 billion that year. Billions in bonuses in the worst year in the company's history. They're not stupid; they're smart. They're looting the store before the cops show up.
This is the financial equivalent of the federal government not showing up to rescue people after Hurricane Katrina. Last year the five biggest Wall Street securities firms lost $25.3 billion. The executives at those companies still took home $26 billion in bonuses. In other words, they wouldn't have lost a nickel if they hadn't taken any bonuses.
Do you think if the guys up at the top still owned the companies they would allow their employees to take home $26 billion in bonuses when they lost $25 billion that year? Self-interest would never allow that. But now no one is looking over their shoulder.
So who cares what the company loses? Take the money while you still can. The Treasury Department still hasn't shown up to take over these looted stores. In fact, they keep pouring taxpayer money into these same shops, as the money continues to move out the back door. Tim Geithner is the worst sheriff in the world.
But we already knew that. Because the main guy who was overseeing all of these banks in New York, as they took these giants risks, was the president of the Federal Reserve Bank of New York - Tim Geithner.
He is under the misimpression that his job is to protect the sanctity of the banks. Not only is that not his job, but that is working against his actual goal. His real job is to stabilize the financial system, with or without these particular banks or bank executives. The longer he keeps these guys in charge, the longer the looting continues.
Somebody send in the cavalry already. Geithner and Summers make it appear as if we are all dense and don't get the urgency of shoring up the financial system. We all get it. But there are several different ways to skin that cat. And their way is not working - and because of the fundamental flaw in the system - cannot ever work.
Even if they stop the bleeding in the short term, if they don't fix the flaw, the executives will be back to the same routine very shortly. Why? For the same exact reason that Greenspan thought the system couldn't fail - self-interest.
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THANK GOODNESS YOU ADDRESSED THIS:
HOW the Banksters stole the FUTURE!
Look under the HOOD of a Derivative which a bunch of mortgages sliced up and packaged together!
HIDDEN FEES: Project the Housing Hyper-Inflation of 2004 to 2006 forward TEN to Twenty Years and add Hidden Fees to the Cost of the Derivative. Then SKIM off the FEES into Executive Pockets!
So the Derivative starts its life at 50% of FACE VALUE!
The Banksters sole the FUTURE in another WAY! They skimmed off so much INCOME (including Bonuses) that they left their Banks as EMPTY SHELLS unable to weather even a small storm much less a Massive Storm like this CRISIS! There were also many other FEES the Banks Collected and Skimmed!
They stole the future of AMERICANS, Their Own Banks, and possibly the Capitalist System!
Main Street is being strangled by Wall Street to squeeze money out of TAXPAYERS!
YET they all still have their JOBS and Congress is still getting a steady stream of BRIBE MONEY from Wall Street, $5 Billion over the last ten years!
G R E A T article . . . Fabulous.
My gut feeling - my base human instinct
IS and has been all along that . . .
WE ARE PAYING IT FORWARD FOR GREEEEEDY CEOs,
their stockholders and (financial and political) insiders
that all (must be) in collusion on this injustice.
I was starting to foster hopes that *Geithners promise*
that this is being done to protect us and the financial system.
I am grateful that Mr. Uygur clearly delineates the apparent facts
leading up to the pathetic place that we are headed.
. . . topic supports my logic and deep seated intuition . . .
Tired of banks getting bailout money only to ask for more and stonewalling when asked, "What did you do with the taxpayer's money?" Take the poll at:
http://www.pollpub.com/if-us-banks-get-more-bailout-money-should-one-of-the-conditions-be-that-all-bonuses-be-returned.aspx
Good, there seems to be lots of agreement with Cenk's thoughts on Flaw in Bank System. How about a productive discussion; we are convinced that the system is set up wrong so HOW DO WE GET THE INTERESTS OF BANKERS AND DEPOSITORS ALIGNED?
Please let me know if you have you seen any productive discussions on solutions.
STUNNING!
This has got to be the most cogent explanation for the whole financial mess that’s ever been written.
Not only that… Mr. Uygur’s basic argument goes a long way towards explaining a whole host of other problems that plague our country. Just a couple of examples:
Why is healthcare such a mess in this country? Because it’s a lucrative business with billions of dollars in play, and a lot of very smart people all competing to grab as much for themselves as they can. Sick people are not human beings, they’re revenue sources, to be maximized as much as possible.
Why is government such a mess? Because the people in charge represent themselves, not the people who elected them. Their every action is predicated on the question, “What am I going to get out of this?”
Cicero’s question, “Cui bono?” (Who benefits?) is as relevant today as it was 2,000 years ago.
This article is so spot on. What is really sad is that it has taken this many years and this type of catastrophe for it to be known to everyone else. Several years ago, I worked for a financial firm and my boss was the most untrustworth businessman I knew. As a person he was great, to do business with, a slime ball. At the end of the 3rd quarter every year, the CEO would come and say: "we need earnings. You need to book premium." So of course, the only way for this to happen was to write crap. Well, in 2004 when some of that crap went back, my boss was "let go". Never fired of course, but he was able to collect his 2 years of severance. I found this insane - this guy, as slimy as he was, did what his CEO and the board asked: BEAT LAST YEAR'S EARNINGS. That is all that mattered - the annual return. It doesnt take a finance degree to know that a company cannot grow by double digit every year forever - what goes up must come down. He should have been fired, but certainly not for the reason he was. But then, isnt that what the board of directors were put in place to do?
Excellent post. It is a shame that the moronic Rick Santelli's of the world (i.e. listeners of right wing talk radio) don't understand that it was the trading in derivatives (credit default swaps and the like) by the insiders at the financial institutions, in pursuit of the illusion of profits for the ultimate purpose of taking huge bonuses, that is at the heart of the collapse. Not the "subprime problem" which was the mere spark that set off this bonfire. acai berry
I am in total agreement with this article and have said as much myself many times. Come on people! What would you do if you were given 9 million dollars and you got to keep it, no matter what you did.
Frankly I am surprised these execs didn't just flop on the floor and go into seizures so they could like disappear with their bonuses and no longer have to do any work at all. If they knew they sucked, at least they would have ensured they were doing no further harm. But NOooooooo. A humble man, an honest man, a man with a conscience does not rise to the top of the garbage heap. And we know this .. don't we! Look around you, and you will find the honest, humble, hardworking, idealistic fools are not in these same positions. I think it boils down to money having less value unless you get to flaunt it like you deserve it. And there is probably more there as well that a sane individual simply cannot understand, because our minds don't work the same way. You are viewing different animals altogether - not exactly human, not exactly non-human. We can be flabbergasted all we want at the lack of simple human values. ROFL. In reality we created and rewarded these money consuming sociopath monster machines, and now we are shocked?
Well said, most of us "little people" figured this out from the beginning which is probably why there is so much public anger. I have a question, if the stock holders could vote on executive compensation, would that change business as usual in a positive direction?
Excellent post - It articulates better what I have been saying on HuffPo for weeks.
Vegas is the paragon of corporate morality and fiscal virtue compare to Wall Street.
This is not a system but a moral failure of our financial instituions and we are all
responsible by endorsing the mantra,in the closet or openly, that greed is good.
I am sure that Tim Geithner is a smart fella and want to do good but like any former
or current Wall St player, his judgement is impaired between self-interest and the
nation interest. After all pissing off Wall St wont make his comeback easier.
This error of strategy will be costly for the nation and Obama admnistration.
I AGREE WITH, AContario
At least the State of Nevada regulates Vegas. That's more than can be said for Wall Street.
so the greedy spore holes are why this country is in shambles and I am losing everything due to major downturn in business? Seems criminal to me. I feel doomed right now.
Bear Stearns was 40% owned by its own employees.
When they were sold off at $2 per share, it devastated the workers there.
The same goes for Enron. Those who lost the most were the employees.
If you were restricting this only to the CEOs, I might agree with you. But it sounds like you're talking about individual workers, out to make a fortune.
I don't even pay that close of attention to the banks, so if I can think up two examples where your thesis is wrong, I'm guessing it's just plain wrong in general.
@ProudMormon
You've totally missed the point of this article. He's not talking about workers, he's talking about executives. We already knew that companies do not care about their employees. This article is simply saying that company executives do not care about the company's shareholders either (whether those shareholders are employees or not).
Those at the top of Enron and Bear Stearns made millions in bonuses and then probably sold most of their shares when they knew the company was about to go bust.
"Those at the top of Enron and Bear Stearns made millions in bonuses and then probably sold most of their shares when they knew the company was about to go bust"
That's EXACTLY what they did at Enron. They encouraged the employees to buy stock, then when the stock price was going down they sold their shares and wouldn't let the employees do the same. Those at the top made millions, the employees were screwed.
The emlpoyees were suckered.It all started with eastern airlines.They got them to "buy shares "in the company and stole everything pensions included.why do you think these CEOs should get away with stealing everything AND destroying their companies?
About time somebody stated the obvious. Thanks, Cenk.
This looting of public corporations under the guise of "bonuses" is blatant embezzlement. The funds "earned" by these executives must be seized, and criminal charges filed. Instead of making off with another gov't bailout they should be trying to make BAIL.
Spot on. The system is set up wrong; as your title suggests the interests of Bankers are not aligned with the interests of Depositors, there is a total disconnect on risk taking. I would go as far as to re-title it THE BANKERS DON'T CARE ABOUT DEPOSITORS, but that might be too blunt and too unpopular to be productive.
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