ResourceWise

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.

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.

Fear and Greed: Premise for Capitulation and Overreaction

The financial markets must serve society in a manner that minimizes the chances of an economic Chernobyl. In its current form the markets are a collection of camouflaged time bombs that can be triggered off by any intelligent fool that has access to it – including the hedge funds and private equity funds that aren’t regulated but can play in the market and destroy value to create wealth for themselves. Their licence to steal needs to be revoked. There is a huge ocean of debt (estimated by some at $7.5 Trillion!) whose toxicity is still unknown. Unfortunately the same players and entities that are center stage in the bailout are now being empowered by society to fix the problem. I think the rules of the game need to be re-written and brutally enforced so that greed can be tempered by fear, rather than feeding on it.