Tuesday, November 10, 2009

Incentives Still Count

"In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and [Fed] announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks. ... We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury's 'pay czar' Ken Feinberg. ... Those companies--and executives--owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution. ... But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits. ... The irony is that judgment about what constitutes 'excessive risk' at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks 'excessive' now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kinds of risks warrant tighter compensation rules. And these new guidelines may also drive the best and the brightest out of the banks and into less regulated institutions", my emphasis, WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489263857516126.html.

"Tis a consummation devoutly to be wished", Hamlet 3:1:6, that the "best and the brighertst" are driven from our banks. Regulated institutions don't need them. Feinberg may be smarter than I think. Driving the "best and the brightest" from the banks may be in Yves Smith's parlance, "A feature, not a bug", a backdoor to a new "Glass-Steagall". The WSJ does not take the Big 87654 and SEC to task here. Isn't Citigroup an SEC registrant? What does the SEC look at? Isn't Citigroup "audited" by KPMG, whatever that means? Isn't KPMG "reviewed" by the PCAOB, whatever that means? Regulation is the cover up of the cover up. No one blows the whistle. Why? Feinberg applied pay controls to seven companies after "Vampire Squid" repaid its TARP money. Hmm. How about this Feinberg: prevent any bank holding federally insured deposits from lending to a TARP recipient?

7 comments:

svend said...

"Regulation is the cover up of the cover up. No one blows the whistle."

You'd agree with FM then:

"I think regulator and legislators should drop the facade and reveal the audit opinion for what it is: A government sanctioned confidence game providing false "assurances" to no one about nothing."
http://www.accmanpro.com/2009/10/30/too-big-to-fail-too-good-pr-more-like/#comment-21475942

Which doesn't make me too happy. I'm a semester from graduating in a MAcc.

Anonymous said...

"Glass-Steagall in drag"?

I wish... maybe so... although selectively applied to only the sickest...

I imagine Jamie Dimon in glee over the dismantling of Citi and Bank of America... his competition for balance sheet heft... Jamie doesn't want Glass Steagall though... so we won't have it...

Independent Accountant said...

Svend:
I am in large agreement with FM. FM and I disagree about what to do to improve the situation.

IA

svend said...

How would you improve it? I am no further ahead at this point. Seems the auditors have the same inherent conflicts as the ratings agencies.

Independent Accountant said...

Svend:
You are correct. Read my series of posts titled, "31 More Years". The problem is called "The Classical Agency Problem". My solution: increase CPA liability and the ability of investors to sue CPAs. As the cost of "bad" audits rises relative to "good" audits, we get less of the former and more of the latter.

IA

Anonymous said...

I remember a story from the WSJ published about twenty years ago. The mangers of the manufacturing facility making refrigerators in China was producing a highly flawed product.

The Central Party got fed up so they sent "representatives" to the factory. The reps found the 10 senior memebers of the factory's management team, marched them to a field behind the factory, and proceded to execute them.

The reps then appointed 10 new managers and promptly left.

NOW THERE IS INCENTIVE!!!!

Svend said...

IA, I suppose the Big4 et al would tantrum if any threat to their little scam was made.

Related. I am going to pass on a big4 offer. After a short career selling my soul as a business journo, I just don't think I have it in me again. I'm told this is the most idiotic move possible. But I don't really care.