James Cayne, the chairman of Bear Stearns, will emerge from his company's crash with stock valued at $14 million. That's in stark contrast to what has happened to the millions of investors who had money in the company, not to mention the mortgage holders whose paper was part of the pyramid scheme which has left thousands of Americans who have lost their homes. The New York Times calls it "socialized compensation" which, we're learning, is morally and politically superior to "socialized medicine." We don't know how Mr. Cayne may feel about single-payer healthcare or investments in other forms of American infrastructure, we just know he made out like a bandit.
The value of his stake in Bear Stearns collapsed from about $1 billion a year ago to as little as $14 million at the price JPMorgan Chase offered for the teetering bank on Sunday. Still, Mr. Cayne was paid some $40 million in cash between 2004 and 2006, the last year on record, as well as stocks and options. In the past few years, he has sold shares worth millions more.
In other words, James Cayne -- and many others like him -- take no actual responsibility for what they have done, while the government finds a way of justifying its own actions. Meanwhile, bankers are treated so well by this system that they are encouraged to do it all over again.
Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless — or not, if the Fed feels it must step in. But as a rule, they won’t have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.
... Until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.
Meanwhile, some are looking at former Fed chairman, Alan Greenspan, who appears to have some real responsibility for the crash. Greenspan is full of self-justifications, but it won't end there, according to the Washington Post. Even his former deputy, Alan Blinder, gives him low marks.
Alan Blinder, a Princeton University economics professor who was vice chairman of the Fed under Greenspan in the mid-1990s, says that the delay in raising rates in 2003-04 was a "minor blemish" on Greenspan's "stellar" record managing monetary policy. But Blinder says that he would give the former chairman "poor marks" for bank supervision, another key role of the Fed.
Blinder said that Greenspan "brushed off" warnings -- most notably from fellow Fed governor Ned Gramlich -- about mortgage abuses and dangers.
"Lending standards were being horribly relaxed, and the Fed should have done something about that, not to mention about deceptive and in some cases fraudulent practices," Blinder said. "This was a corner of the credit markets that was allowed to go crazy. It was populated by a lot of people with minimal financial literacy who were being sold bills of goods by mortgage salesmen."
As the New York Times editorial cautions, this is bound to continue on the Street if responsibility isn't clearly assigned. If memory serves, two Federal Reserve members were firmly against -- even angrily against -- the 3/4 point drop the board authorized the other day.
...If the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.
The skin of the Federal Reserve and the federal government should be more clearly in the game, too. Meanwhile, conservatives need to get a grip on themselves and join the rest of us in calling for much-needed regulation of the "shadow" banking system, as Paul Krugman writes today. "It’s time to relearn the lessons of the 1930s, and get the financial system back under control."
We shouldn't assume 1929 can't happen again.
