Lecture on executive pay and the crisis

[Tamas]

Weird.  I'm agreeing with Marty here.  If a guy at a company can make 5 dollars today and lose 10 tomorrow he'll do it so long as he's not working there tomorrow morning and he doesn't have to suffer the longer term consequences.  You can't expect a company to be rationally self-interested because the running and working at the company have different and often conflicting self-interests.

Yes. In a big enough company you have the actual management of risks completely detached from ownership of the company (and thus from responsibility).
That is a challenge, but making regulations more complex is not the answer. If there is a rule, there is a way around it.

And I am not advocating (notice how I am hinting a reference on  "The Advocate", Marty's chief source of world knowledge, to score good points with him) the de-criminalization of, well, criminal neglect and misinformation of clients/customers. Quite the contrary. You had scumbags deliberately fooling people by packagings toxic assets in a way as to hide their risk, and the "punishment" was an insanely huge check from the government to keep them afloat.

What we need is personal accountability and responsibility upheld by law.  This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

[Razgovory]

What do you suggest we do?

[Barrister]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

[PDH]

The only proper solution is to kill all the lawyers.

[Tamas]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.

[Barrister]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.

I'm not saying that the criminal law should not have some part to play in regulating economic activity.  Punishment plays a part of it.

But to say that only criminal law should be involved?  So there is no room for banking or securities regulations in your mind?  That is so foolish I hardnly no where to begin.

[Malthus]

It seems from this the problem is a sort of vicious circle of over-valuing risk. Shareholders of financial institutions are willing to pay top dollar for business leaders that have a track record of getting higher than average returns. Those leaders (and presumably the shareholders) attribute the higher returns to some sort of manegerial genius, when in reality it could be a simple willingness to (successfully, for a time) tolerate a higher-than-wise level of risk ... the result can (and arguably has) been skyrocketing compensation combined with busted bubbles, when those risks turn out badly.

[The Minsky Moment]

Ownership and control rights are the equity portion of the balance sheet. There are a few problems with looking at the equity section of the balance sheet, especially for financial firms. . . Very generally speaking, liabilities are based on the value of what is owed at the point in time the balance sheet is dated. However, many assets are not. Some assets are not valued at all, some are valued at some point in time previous, and some are only valued based on whether they were transacted. Two firms with identical assets could show very different asset values. This is a big problem with using ROA. Because assets = liabilities + equity, and liabilities are relatively consistently measured and equity relatively small, the variations in how to measure assets are amplified in how equity is measured. Book equity is even more problematic to use in any type of analysis.. . .

Agreed with all of this.
I would also add that is misleading to posit the simple proposition that all "control" is vested in equity.  The equity is conferred with voting rights, nothing more, and sometimes even not that (depending on class). Thus the equity holders with full voting rights may be able to exercise control as a collective, but the reality is that they are rarely able to act that way.  More typical is that either a small group of big shareholders exercise effective control (even if collectively a minority), or - if shareholding is particuarly diffuse - the CEO and allied board members can exercise effective control with little check from equity holders.

On the other side, holder of debt interest can exercise very significant control through use of strong covenants, that e.g., require bondholder consent before certain kinds of transactions can take place, or that give bondholders various powers if certain convenanted ratios are breached.  A big part of the credit crisis which is not mentioned in the article was the erosion of tough covenants and the rise of "covenant-lite" instruments prior to the crash.

Finally, as AR points out, a big part of the liability structure for commercial banks are bank deposits.  Depositors are insured by the government and thus exercise no effective control over bank actions.  But the FDIC, the Fed and the OCC among others do have extensive powers to investigate and inspect covered banks and to a certain extent exercise control.  That is another part of the story.

[The Minsky Moment]

I don't understand your objection.  A hypothetical is proposed, and the conclusion drawn that, had the hypothetical been true, "US bank CEOs would have had a watertight defence back in 2007."  That makes perfect sense to me.

It's easy to pick start and end points and show a correlation - leaping from that correlation to a suggestion of some linkage is what is questionable.  And if there is no linkage being suggested, it is just a non sequitur.

[grumbler]

The only proper solution is to kill all the bankers and lawyers.

FYP

[DGuller]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yes and no.  It can't prevent crimes that are already committed.  It can intimidate people into not committing crimes by setting example on people who have.

[Tamas]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.

I'm not saying that the criminal law should not have some part to play in regulating economic activity.  Punishment plays a part of it.

But to say that only criminal law should be involved?  So there is no room for banking or securities regulations in your mind?  That is so foolish I hardnly no where to begin.

I am taking an extreme position, yes. Consider it a direction. In general, in my view, society should find the point of minimum necessary government involvement in life as a whole (and that may be quite far from no involvement at all), and not, like it seems to be nowadays, seek more direct steering to every issue (financial crooks, children being children, etc). Because that is bound to fail.

[HVC]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yes and no.  It can't prevent crimes that are already committed.  It can intimidate people into not committing crimes by setting example on people who have.

Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.

[DGuller]

Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.

I don't buy into the idea that there are two classes of people:  criminals and non-criminals.  I think a lot of people can be criminals in one country, and non-criminals in other countries.  It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.

[Tamas]

Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.

I don't buy into the idea that there are two classes of people:  criminals and non-criminals.  I think a lot of people can be criminals in one country, and non-criminals in other countries.  It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.

plus, there are people who, for example, don't commit petty crimes because they consider it immoral. And there are others who don't commit petty crimes because they are afraid of getting caught. ALL of the latter are stopped from stealing via the punishment system.