Banker bonuses

[Jon Miller]

Really the bankers should be fired. That is what would happen to other companies that were run into the ground...

JM

[Blaupanzer]

KH, do you believe the nonsense you just posted? If they don't take the money, they fail. If they take the money, the government gives them cover, even if they made millions letting the bank assume unsustainable debt. Limiting incentives to a fraction of something is usually how it's done. Since the banks are hemorraging money, it makes no sense to tie incentives to income, and it seems immoral to tie a bonus to total transactions, when these are negative. The TARP takers are about to meet the bureaucrats in the form of regulators, who are going to want to know how every dime of Uncle Sam's money is spent. Now it is possible to fool these people but not if the bankers are "eager to gamble federal money (since their stock is junior to federal money)."

[DanS]

Vet: Am I remembering correctly that you are in IT in the banking sector?

[VetLegion]

Yes, I am. Excellent memory. I haven't been around in a while.

[Naked Gents Rut]

The problem is that nobody's sure which banks are insolvent and which aren't.

Well, you'd obviously have to audit the bank balance sheets first to determine this. Should be a nightmare with all the MBS and the like, but it has to be done sooner or later. Zombie banks are not a good thing.

[Darius871]

The problem is that nobody's sure which banks are insolvent and which aren't.

Well, you'd obviously have to audit the bank balance sheets first to determine this. Should be a nightmare with all the MBS and the like, but it has to be done sooner or later. Zombie banks are not a good thing.

Seriously, as a practical matter how would they even conduct these audits? Literally send an inspector out to a home to determine condition, get a local realtor to adjust that appraisal for local market conditions (both present and projected), hire a lawyer to re-check title encumbrances, conduct a CBR check to reassess likelihood of the mortgagor's default (taking into account projected job losses generally), and repeat ad nauseam until every single mortgage in every single security has an accurate present and future value to reflect on the balance sheet?

There's more than enough talented people out there to do the legwork but the costs would be utterly insane; it wouldn't surprise me if each $100K that the asset side of the balance sheet is nudged toward accuracy would be coupled with $10K in administrative costs expended just to ascertain that fact, and that's a $10K the bank probably doesn't, in actual fact, have. It's this simple paradox that makes temporary nationalization sound A-OK to me, if for no other reason then to gradually get these assets off the books in the way that TARP was originally supposed to do but had no time to do.

[Victor Galis]

Why screw the othe 49 percent for the actions of the 51 and the majority, controlling shareholders?

I'd agree with your plan, only wipe out the shares of the folks who were running the businesses, and compensate the other shareholders.

In a capitalist system, when a company becomes completely worthless, we usually don't compensate the poor fools that invested in it. The whole reason you make money as an investor is because you take some sort of risk. Compensating shareholders gets rid of that risk.

The problem is that nobody's sure which banks are insolvent and which aren't.

William Buiter's suggested plan gets around that difficulty somewhat. (I think this is the post http://blogs.ft.com/maverecon/2009/0...e-case-of-ing/)

It goes something like this:

Step 1: Create a new bank for every bank that you think might be insolvent.
Step 2: Have the new bank buy its counterpart's good assets. In this case, good means those which can be priced in a market.
Step 3: Withdraw the old bank's banking liscence.
Step 4: Transfer most of the employees to the new bank.

This leaves the old banks with their shareholders, creditors, and bad assets. If those bad assets turn out to have some value, the shareholders and creditors get paid something down the line. Meanwhile, the new good bank is free to operate like a real bank that can make loans and whatnot.

In lieu of the guillotine, what would be your approach? The Swiss approach has some flair -- they've confiscated the passports of their bankers.

I suspect ritually sacrificing the bankers to the animal spirits of the market and praying for confidence to return may be as viable a plan as we're likely to see these days.

[Darius871]

Kudos to NGR for prescience, though it seems like the GOP's ironically more on board than the administration:

Bank nationalisation gains ground with Republicans
By Edward Luce and Krishna Guha

Published: February 17 2009 19:44 | Last updated: February 17 2009 21:31

Nationalisation, long regarded in Washington as a folly of Europeans, is gaining rapid ground among US opinion-formers. Stranger still, many of those talking about federal ownership of banks are Republicans.

Lindsey Graham, a Republican senator for South Carolina, said that many of his colleagues, including John McCain, the defeated presidential candidate, agreed with his view that nationalisation of some banks should be “on the table”.
Mr Graham said that people across the US accepted his argument that it was untenable to keep throwing good money after bad into institutions such as Citigroup and Bank of America, which now have a lower net value than the amount of public funds they have received.

“You should not get caught up on a word [nationalisation],” he told the Financial Times in an interview. “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks [without gaining public control]. That’s what the Japanese did.”

Barack Obama, the president, who has tried to avoid panicking lawmakers and markets by entertaining the idea, has recently moved more towards what he calls the “Swedish model” – an approach backed strongly by Mr Graham.

In the early 1990s, Sweden nationalised its banking sector then auctioned banks, having cleaned up their balance sheets. “In limited circumstances the Swedish model makes sense for the US,” said Mr Graham.

Mr Obama made it clear last week that he favoured this model over the piecemeal approach taken in Japan, which many would argue is the direction US public policy appears to be heading.

“They [the Japanese] sort of papered things over,” Mr Obama said. “They never really bit the bullet . . . and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.”

Senior administration officials acknowledge that the financial rescue plan unveiled by Tim Geithner, Treasury secretary, last week could result in the temporary nationalisation of some weak banks.

The plan sets out a framework for revealing the extent of the likely credit losses facing banks. Most private sector analysts believe the exercise will reveal that some banks have large capital shortfalls.

Policymakers acknowledge that, if this is so, it will be difficult for those with the largest shortfalls to raise the required equity from the markets; in which case the government would probably have to take temporary control. Moreover, while nationalisation remains taboo in some political circles it is increasingly openly discussed among economic policymakers of all leanings.

“If necessary you temporarily nationalise some of these institutions,” said a former senior Republican policymaker. “There has been a lot of pussyfooting around because we don’t like the word – which strikes me as utter nonsense.”

The time for biting the bullet may be fast approaching. In early April, big institutions publish their first-quarter results. If Treasury stress tests have not yet revealed the true state of their balance sheets, first-quarter results might do so.

“The first week in April – that’s when the children’s party is over,” says Chris Whalen, co-founder of Institutional Risk Analytics. “That is when the obvious will become apparent.”

The Obama administration remains officially opposed to control. Mr Geithner last week said: “Governments are terrible managers of bad assets.”

Others say Mr Geithner may have no choice. “The danger we face is a Freddie Mac/Fannie Mae scenario where government gives the banking sector guarantees and then socialises the losses,” says Adam Posen, an economist. “That’s the worst thing we could do.”

http://www.ft.com/cms/s/0/2ad3b750-f...nclick_check=1

[Patroklos]

You guys realize that banks were forced to take TARP money regardless of whether they wanted it or needed it, right?

[Naked Gents Rut]

That's not true.

[Ramo]

The problem is that nobody's sure which banks are insolvent and which aren't.

Yep. Otherwise, investors panic and get out of solvent banks. Hopefully, that's the secret plan with Geithner's stress test. Figure out what's what, and then nationalize the insolvent banks.

Greenspan of all people just came out in favor in nationalization. We're all Swedes now.

[DaShi]

[KrazyHorse]

My approach would be to just fire them all and appoint somebody cheaper. Economists who would work for say $100 000 a year. Anyone who thinks being a CEO of a bank is rocket science is delusional. It's not like they need incentives in order to perform well. If they all decided to quit in protest the banking system would be no worse off than it is.

I agree that firing them is a viable option. The problem is, it has to be retroactive and the government has to credibly make the case to other execs that nobody else who takes TARP money will be fired (to stop them from trying to hold out sans TARP money in order to preserve their jobs)

If they can manage this then I'm fine with it.

[Darius871]

Yep. Otherwise, investors panic and get out of solvent banks. Hopefully, that's the secret plan with Geithner's stress test. Figure out what's what, and then nationalize the insolvent banks.

If that's the case, however, how will they go about figuring out what's what? Outside auditors or just relying on the companies to do it themselves? I assume the boards & managers wouldn't be all that cooperative in finding out for Uncle Sam just what their MBS assets are actually worth, since that would actively assist in what's anticipated to be a total wipeout of their shareholders, exposing to fiduciary liabilities, not to mention a risk to their own jobs. Unless the TARP conditions have very rigid requirements of audits and what they'll consist of, which would legally trump any obligations to shareholders.

Do any beancounters here know what the actual auditing method will be here, and by whom? I'm genuinely curious.

Seriously, as a practical matter how would they even conduct these audits? Literally send an inspector out to a home to determine condition, get a local realtor to adjust that appraisal for local market conditions (both present and projected), hire a lawyer to re-check title encumbrances, conduct a CBR check to reassess likelihood of the mortgagor's default (taking into account projected job losses generally), and repeat ad nauseam until every single mortgage in every single security has an accurate present and future value to reflect on the balance sheet?

There's more than enough talented people out there to do the legwork but the costs would be utterly insane; it wouldn't surprise me if each $100K that the asset side of the balance sheet is nudged toward accuracy would be coupled with $10K in administrative costs expended just to ascertain that fact, and that's a $10K the bank probably doesn't, in actual fact, have. It's this simple paradox that makes temporary nationalization sound A-OK to me, if for no other reason then to gradually get these assets off the books in the way that TARP was originally supposed to do but had no time to do.

[onodera]

Mr. Monopoly? Isn't his name Uncle Pennyworth?