A Roadmap to Turn Around Problem Banks

The key to financial stability and reform at major banks is simple. The President, through his force of stature, could go to the nation's most successful and conservative banks, such as Hudson City Bancorp (HCBK) and request that some of these banks' executives and loan officers be placed in leadership positions at problem financial institutions. Of course, the incompetent executives they replace would have to be fired.

Most well run banks would naturally view losing talented executives as a raiding of their ranks, and rightly, as a penalty, rather than a reward, for their excellent performance. The government could issue to these well-run banks modest amounts of stock options in problem banks where their former executives have been placed as partial recompense for the loss of talented executives and the strengthening of competitors.

In addition, as Carl Icahn rightly points out, retention bonuses should only be paid to executives that a rational business enterprise would want to retain. This rules out the vast majority current of executives at many major financial institutions (let them find work elsewhere after they have destroyed their current employer!). However, few would object to paying performance-based bonuses to executives who have left healthy, thriving banks and insurers for those in need of their managerial expertise, as a public service to the country. The debate about compensation at financial institutions in which the government has a stake could then become rational.

Reckless managements must be replaced by those with a proven track record for performance. The current strategy of many incumbent CEOs is to engage in an arbitrage, whereby intelligent and conservative risk control is replaced by political lobbying aimed at keeping their jobs and getting access to government coffers when they fail in their fiduciary duties. This must stop. Getting the best managers to work for the worst banks and insurers is the key to real turnarounds and lasting financial stability.

Comments

[BRUCE E. W.:]

I am sure that the head bankers would retreat from being managed by public authority as they might if they wwere considered a primary utility, but perhaps there is a question as to whether a public health care system is needed in banking to run with the public interest. Certainly this article is asking the right questions and providing some constructive pathways; Maybe a Banker General position should be floating over all the banks as a ready to go orchestrator of supervision much the same way as the attorney general supervises the public interest. In any case, there is no doubt that Harry Long should be awarded a medal for starting to question the institutional framework as it exists for the "too big to be held accountable" con-artists who have been holding themselves to their own standards for much too long. POSITION: LONG ON HARRY

Jun 20 12:31 PM

[Econ 101:]

First, Derivates like CDOs should be properly classified as insurance and regulated. The laws are there to enforce the rules, but politicians are paid off not to enforce te rules against their contributers. Laws are only enforced against those who dont pay off the politicians.

First example; Tim Geitner.

Second example; Kevin Johnson Mayor of Sacramento and acused Ameri-corps cheat who had the IG sacked because BHO didnt want his friend and BB player not to be elidgeable for Federal Funds.

Support HR 1207, an audit of the Federal Reserve

Jun 20 12:48 PM

[BRUCE E. W.:]

www.milkeninstitute.or...
As a follow up to the above comment, it is interesting that a group of high ranking professionals at Milken Institute Global conference 2009
(finace citation hyperlink above), included the following:
"Robert Kelly of The Bank of New York Mellon emphasized a theme, echoed by the panel, that the U.S. regulatory regime is structurally challenged. In particular, panelists concurred that it is very difficult to navigate or understand the complex, bureaucratic U.S. regulatory structure. A single systemic regulator would, at least in theory, fix this problem by placing a single office in charge of (systemic) risk management. While panelists generally expressed confidence that the concept will be developed, they agreed that it is not clear who will have the authority to implement it (whether the Federal Reserve or a team of regulators).

Alan Boyce of Absalon and Adecoagro suggested that the current crisis stemmed from the complex, opaque way in which the U.S. banking system securitizes cash flows. He called for a new system, arguing that the current structure is designed primarily to benefit the middleman and not market participants.

Bo Lundgren of the Swedish National Debt Office and Robert Litan of the Kauffman Foundation emphasized the potential benefits that could be realized from carefully analyzing the best practices employed by other nations (e.g., Denmark and Canada)."

It would seem clear, then, that a consolidate regulator agency is not such a bad idea. The big question thereafter is whether it would be subject to easy manipulation and capture from BIG MONEY. The idea in the article is to float the best achievers and to sanction a team possibly from the regulators themselves based on merit. Unless it becomes a lifetime job (like the supreme court judgeship) the question of compromised integrity and duplicity will remain a prominent and perennial perplexing problem. A Banking and Finance Governor General with an associate working team (regional and proportionate to the job) seems more than an average pipedream. It should be separate but equal to the Fed; and recapitulate a Balance of Power Structure inherent to our
Executive/Congressiona... format.

Jun 23 03:32 PM

[Mark54:]

Don't confuse a turnaround exec with a conservative management team. I understand the point you are trying to make but no bank executive has ever had to deal with anything like we are experiencing now. Going back to 1999 I can't see that Hudson ever had to remedy any credit quality or capital problems. I agree these guys know what banking is and know how to responsibly grow a financial institution but the time to truly turn around a trouble institution has passed. That time was early 2008 when there was still a glimmer of a market for these troubled assets.

Jun 24 10:58 PM