THE BLOG

Do We Really Need Uncle Henry's Fantasy Finance Eggs?

08/27/2009 06:44 pm ET | Updated May 25, 2011

(Neighbor 1) "My Uncle Henry thinks he's a chicken."

(Neighbor 2) "So why don't you have him institutionalized?
(Neighbor 1) "We need the eggs."

Uncle Henry is still clucking away on Wall Street even though we know his imaginary financial eggs crashed the world financial system -- fantasy finance eggs that turned into trillions of dollars of financial toxic waste. To prevent the Great Depression II, we could not afford to institutionalize all the Uncle Henrys. In fact, we had to bail out their institutions with trillions of dollars of tax payer money.

Uncle Henry is still laying his imaginary eggs. Goldman Sachs, for example, recently announced it was selling synthetic CDOs again even though these are the most prone-to-disaster financial instruments ever created by Wall Street's financial engineers in the run up to the crash of 2008. (Of course, they are still unregulated.) Even more importantly, Uncle Henry wants to be paid in full for those eggs, just like he was paid before the crash, a time when everyone thought the eggs were golden.

Andrew J. Hall, for example, an oil speculator, expects to receive a $100 million paycheck from CitiGroup -- the same bank that has received more than $350 billion in taxpayer funds and asset guarantees. When we object to this obscene payday, we are told that Hall lays the best golden eggs, that he has a valid contract to be compensated for his eggs, and that CitiGroup needs the eggs so that it can repay the taxpayer. While Uncle Henry would certainly feel comfortable with this logic, it drives me insane. After all, Hall's contract would have been worthless had we not bailed out CitiGroup. (Beyond that is the critical question of whether or not Hall's eggs represent any real value to our economy, or just pure speculative actions that actually just transfer money from the rest of us to him, as I argue here.

France also is questioning the logic of paying astronomical sums to its own Oncle Henris. They are calling for new regulations that would allow no more than one third of any bonus to be paid out in the first year. The balance would be payable over the next two years. Also, at least a third of the bonus must be paid in stock. And here's the kicker: If the trader's department loses money in any of those next two years, the trader with the big, fat bonus would lose part of his deferred bonus.

Critics already are blasting away at these modest restrictions. They seem outraged by the idea that a trader could be punished for his group's performance: "Regardless of the performance of an individual trader, if his group loses money because some imbecile makes a bad bet then the trader gets hammered."

Amazing! Just imagine how often regular workers suffer, regardless of their performance, because some management "imbecile makes a bad bet." I wonder how this sounds to the 30 million unemployed and underemployed who lost their jobs because "some imbeciles" on Wall Street crashed the system.

France doesn't want to lose Oncle Henri to our banks, so it's threatening not to give foreign banks government business if we don't also slap on similar pay restrictions. Of course, France would prefer if the world's leading industrial nations during the next G-20 meeting agreed upon similar restrictions. But the odds are slim. It is likely that more than a few countries will see an opportunity to lure Oncle Henri and his eggs into its banks.

But this is truly insane. All evidence suggests that Uncle Henry's speculative plays on Wall Street and elsewhere destabilized the world economy. The so-called financial innovations that made us believe that the eggs were gold turned out to be fool's gold. Rather than dispersing risk, they linked it together all over the globe. I have yet to see any evidence to suggest that these fantasy finance "innovations" (CDOs, CDO squared, synthetic CDOs and the like) added any value at all to the real economy -- and I've been looking! The Uncle Henrys of this world make and profit from casino games, not from creating economic value.

Worse still, it seems that too many of us still believe that Uncle Henry deserves to be paid astronomical sums. But these pay packages cannot be justified by any economic theory -- the only justification comes from the cynical theory of the golden rule: he with the gold rules.

As far as I'm concerned France's proposals don't go nearly far enough. Vast sums can still go to Uncle Henry. All they are asking is that most of the eggs that are produced won't disappear in three years, and that they are a little less poisonous. My preference would be to slap on a hard cap that limited salaries and bonuses to no more than what the president of the U.S. receives -- $400,000 -- at least until the unemployment rate comes down below 5 percent.

Of course Uncle Henry won't like that. But I'd like to find out what would happen if he took his imaginary eggs and waddled off into the sunset.