On Banking Executives and Risk

I read the NYT Dealbook post on Alan Schwartz, and I have to admit, it completely destroys the entire notion of executives at firms, especially like Bear, as having any real personal risk. Let me quote…

Mr. Schwartz, Bear Stearns’s chief executive during the firm’s near-collapse, has been talking with Goldman Sachs, Citigroup, private equity firm Kohlberg Kravis Roberts and boutique advisory firm Centerview Partners, among others, people briefed on the matter told DealBook.

(emphasis theirs).

Okay, now, here’s the issue I have: Alan Schwartz is the reason Bear doesn’t exist today. Remember the three part WSJ article about Bear going under? Remember what I noted about the first part? Alan Schwartz, who is not a trader, vetoed the very trade(s) that would have saved Bear and was proposed by his senior traders.

What happened from that decision was that thousands of people lost their jobs, the firm went out of business, and a lot of other, very bad, things. That’s fine that he made the decision. I almost don’t care that he was wrong. However, it’s a huge moral hazard/slippery slope/perverse incentive/etc. Alan Schwartz should be toxic right now.

One can argue about Stan O’Neil, Chuck Prince, or any of the other C.E.O.s that lost their jobs but got large payouts. (I don’t support that either, by the way–if you were at the helm, you should take what you’ve already been given and neither ask for nor accept any more. You retire/leave rich nevertheless–but boards were incompetent, stupid, or in league on promising these things, so taking them isn’t the fault of the ex-C.E.O.s.) However, these C.E.O.s' firms didn’t die and go away and they certainly didn’t veto the proposed lifeline with nothing but a body of irrelevant experience to guide them arguing from a place of no authority. These same kinds of hedges worked at other firms.

The common argument says, “C.E.O.s get paid more because they have more risk.” Well the other people at Bear Stearns got less money, are out of a job, and, in this market, certainly are finding it difficult to get a new job. These people probably don’t have millions of dollars. Alan Schwartz does have millions of dollars, is out of a job as a result of something he could control, and can land on his feet as a senior deal maker making millions of dollars? Unacceptable and unthinkable. If this situation defines the rule then C.E.O.s should get paid much less than they currently do and realize that even if they roll the dice and lose when betting with an entire company they will still get a job that pays exceptionally well.

Comments

[User 208427:]

Good article. The reason there are such golden parachutes is that boards are made up of other CEO's and they reason "there but for the grace of God go I".

2008 Aug 01 12:17 PM

[Jimmy Lathrop:]

Speaking as a fringe member of the GOP (the minority wing who believes in free markets, small governments and low taxes a/k/a the Milk Carton Crew), if I could speak from my more mainstream party members they would say something like this - If John Meriwether can blow up two hedge funds in 10 years, why can't we give Schwartz another chance? While we're at it, lets elect Cheney as dictator-for-life. As long as there is another Sex-in-the-City movie and I get my govmint rebate check to make up for the thousands I lost in my Auction Rate Securities I will keep my head down and not say anything against Prime Minister Putin, I mean Bush, I mean the Great Oz, I mean, whatever Goldman Sachs thinks is best, I guess.

2008 Aug 01 11:53 PM