ResourceWise

Outlandish CEO Pay: How to Fix the Problem

It is reasonable to be angered by these examples where CEO pay is clearly unrelated to performance. However there is no silver bullet (e.g. CEO pay caps) that can prevent future melt downs of the markets. Reform is needed across all aspects of the market. Some of the many areas to examine:

1. Establish a clear link between pay and performance for all employees not just CEOs, where performance covers short term results as well as the actions taken to protect the longer term health of the franchise. Pay variable compensation i.e. bonuses based on net income not on revenues.
2. Risk rate revenues and treat the higher risk revenues to higher capital requirements.
3. Separate customer funds from bank funds (revive some form of the Glass Steagall Act, 1933).
4. Examine the social usefulness of activities that take place in the financial markets e.g. short selling, spread betting, high frequency trading, and tax arbitrage. Ban those activities that can cause harm to others.
5. Examine product structures that enable banks to profit from risk taking and pass on all risk to third parties (e.g. to customers, counter parties and tax payers). The cost of risk needs to be fully borne by the originator of the transaction and should not be passed on to other market participants without their specific agreement.
6. Bring all market participants (e.g. banks, hedge funds, private equity funds, insurance cos. etc) onto the same level playing field - with clearly marked boundaries, switch the lights on and let the games begin – in full sight of the regulators.
7. Simplify regulations, consolidate regulators and provide them with massive teeth.
8. Restrict gambling to clearly designated and regulated casinos – not the stock/bond/currency/co... markets.

It is clear to even a casual observer that many aspects of the current markets need substantial redesign. Let’s do that instead of demonising individuals who have just tried to take advantage of a crooked table with loaded dice.

A Scenario for a U.S. and Global Recovery, Part 2: Banks

Alexandre, I agree with your assessment. The shadow banking system and all the players involved in it must be brought out of the shadows and their business models examined in the bright sunshine viz., how do they make money, what purpose do they serve for the economy/financial markets, where is the opportunity for conflict-of-interests, what leverage do they create - thereby adding to the volatility and instability of the system. Without these reforms, we're condemned to serial destruction of value for the investor and huge profits for the speculator. We have to separate the stock markets from the casinos and clearly label them for what they are. Then individuals can choose to participate or not with a clearer view of the choices they make.

Jim Rogers: It's Better To Let Financials Fail

User366653 has taken the trouble to spell out an overview of his plan, so should be lauded for it - whether one agrees with every detail or not. Other commentators need to move beyond slogans e.g. nationalize, wipe out existing shareholders, moral hazard, etc and should actually explain how their plan will work, what risks it would mitigate and what the long term prognosis will be.

Bank Nationalization: The Bigger Picture

This article should be read - carefully, by the quick-fix junkies who somehow believe that wiping out existing shareholders is the way to attract future shareholders. Current stock prices are not an accurate reflection of the value of a company like C that has well established businesses in 100 countries with over 200 million customers. We don't need hasty remedies that support the agendas of people who benefit from the short term volatility in share prices while having no interest in the longer term success of those companies.

Bank Nationalization: It's No Panacea

Rick, yours is a thoughtful rebuttal of the 'nationalization' argument. There is no quick fix. We have to work our way out of these difficulties by keeping the longer term well-being of the financial system in mind.

More on Pay Caps and Populist Rage

Compensation in these companies (especially investment banks) has de-linked from performance for many years. So fixing a cap on salary for the most out of control banks is not unreasonable. It helps manage expectations, calm the talent market and provide the institutions time to align their comp programs and practices with the long term prosperity of their respective organizations. Banks should grasp this opportunity with both hands and build sustainable programs. Just because a politician came up with the idea doesn’t automatically make it bad. Any value investor will know that it makes sense.

Do Paulson and Bernanke Really Understand What's Going On?

When I heard the Paulson-Bernanke-Cox deposition before the Senate Banking Committee yesterday, I did get a sense that they were not taking a multi-pronged approach to the challenge at hand. So Jason's perspective is a useful addition to the picture. I suspect that the Treasury et al are finding it difficult to put all their cards on the table, so we're probably seeing a fraction of the picture. I would vote for an equity infusion provided the respective banks open their books to the government and provide them with an accurate description of their 'current state' with a credible action plan to navigate their way ahead over the next 36 months. The equity infusion they receive will depend on the 'perceived value' of their current situation and the credibility of their 'corrective action plan'. Doing anything less would just mean throwing good money after bad.