Petty and Childish

AP's, Martin Crutsinger, is claiming that "economists" say this bailout is necessary.

The economists cited? Sung Won Sohn, California State University, Channel Islands; and Mark Zandi, chief economist at Moody's Economy.com.

That's it.

Could those who create money-like instruments be required to leave their own assets completely on the line, unshielded by the corporate wall, or any other legal mechanism? Kind of like underwriters at Lloyd's? Same thing for investors in those firms, and for anyone who writes an insurance policy guaranteeing a product or action of those firms?

Hitting CEO's in the pocket book is the only way to avoid complete moral hazard.

It's already a given that the large majority of companies responsible for this mess are going to be bailed out, so natural repercussions to the abuse are already removed.

Government pay for government money doesn't seem to me to be an unreasonable proposition.

Besides, the successful CEO's that kept their companies from financial positions requiring a bailout will still be eligible to receive their sweetheart deals.

Don't go wrong on this one Kevin... I am just about to switch my allegiance to the Democrats over this issue.

Require mortgage originators to keep the liability for the original mortgage on their books, even if the loan is sold and securitized. Current accounting allows bad actors to originate shit mortgages and get them off their balance sheet - thereby effectively washing their hands of them ever being paid off...

Looks like Bush and Paulson are going to get what they want: http://www.nytimes.com/2008/09/22/business/22talkshow.html?hp.

I suggest that a good place to start would be to read Ralph Estes' Tyranny of the Bottom Line. The book is a dozen years old but its argument remains relevant.

Corporate managers have a fiduciary responsibility to maximize shareholder value. Value is accounted for quarterly. This gives manament a structural incentive to think and act on a short term basis. Indeed, if they fail to take advantage of short term profit opportunities they open themselves up to legal liability.

Estes argues that the way in which we account for corporate value needs to change. Stakeholder, as well as shareholder, value needs to be taken into account.

For example, if mortgage brokers had a legal obligation to consider the financial wellbeing of their customers who were taking out sub-prime loans, far fewer of those loans would have been made. If investment firms had to base their year-end bonuses on how their customers prospered, as well as their shareholders, far less money would have been invested in the Big Shitpile.

Now is a golden opportunity to rewrite the rules governing corporate behavior. Ralph Estes' book provides an excellent rough outline of how to do so.

While I despair of you getting beyond yammering about fraud, this isn't bloody Enron. Of course the American mortgage industry in its bowels in the sub Prime had fraud going on, sadly that's not the main driver, and going on about "banking fraud" when you don't even have a fucking clue as to different kinds of institutions is fucking stupid mate. You are quite right on the CEO thing, however, it should take about 9 months after any reg in that area to find a way around.

For your concerns, forget fucking fraud, which is mostly a footnote: You'd do rather better to be scared at how completely fucked up the risk models that "best practice" in risk mgmt - underpinned by dim-witted regulation - are. Not, to perhaps reduce the populist Leftist kneejerking, that reg is bad, its clearly badly needed in exotic fringes. Rather badly done regulation gives everyone that warm fuzzy feeling but does bollocks for solving the fucking problems. VAR, GARCH, and a number of other tools... all 'validated' by regulators. Same for the usage of damned Ratings (which are fine for truly validated areas, like Bonds), again positively pimped by the Regulators.

There, not the actual leverage ratios as you can fucking game that, is the scary part. The bloody RM machine is bollixed up, and having a serious sit down on assumptions that your idiot Greenspan helped promote is a better place to start than chasing after trivial fraudsters (who by all accounts are found largely in the retail end of the industry, and they should be brought properly into your Federal regulation as your bizarre balkanised Reg system is part of the problem).

As for this For example, if mortgage brokers had a legal obligation to consider the financial wellbeing of their customers who were taking out sub-prime loans, far fewer of those loans would have been made. If investment firms had to base their year-end bonuses on how their customers prospered, as well as their shareholders, far less money would have been invested in the Big Shitpile.

Utter shite. Financial well-be3ing of customers involved in flipping properties? Stakeholders is pure bollocks, longer term incentives, and making sure staff owns the results of lending/underwriting for a period tied to risk exposure is the solution. And classically that's what proper underwriters have done. Those that continued did so, are in good shape. Adding on undefinable feel good bollocks about stakeholders just creates a fucking check box.

(The customers of I Banks you idiot are other financial institutions, not bloody borrowers, those bloody brokers largely worked for small to medium regional firms or the odd non-Bank entity like Country Wide).

Kevin,

Why do so many people over-withhold on their income tax, go to H&R Block to get their money back, then pay annualized interest rates of between 300% and 500% for a rapid refund loan that gets the rest of their money to them three weeks earlier than the IRS would have sent it?

Because an IRS refund is "free money." The same is true of money from selling shares or getting a loan. It's free money, and the "expert" who arranges for it sets the amount he skims off the top.

There's a lot of margin for that "skim off the top." It's money you never see, so it doesn't cost you anything.

The same process works for credit card interest rates, and of course when you get that credit care you are sure that you will avoid all the fees that cost ordinary people. Otherwise you wouldn't get that credit card. It's too expensive.

Bankers are experts at setting that "skim off the top" at a level just below your notice. Besides, everyone else is paying the same amount, right?

Put me down as someone skeptical of going after executive compensation.

Here are some ideas I have.

1. There should be a truth commission with criminal penalties. Refuse to testify and it costs you a minimum five years in federal prison. Lie under oath: that's 10 years.

2. The U.S. gov't should tax stock transactions (say 0.1%) and probably transfers of other monetary instruments.

3. Sen. Bernie Sanders had a good point about huge companies. Companies that are too big to fail are too big to exist. The tax code show assess a property tax against companies bigger than a certain size. This should be a graduated tax, so as companies get bigger there is more and more pressure to divide them into smaller companies.

4. The gov't should go after the personal assets of executives and lobbyists who were negligent or advocated for policies that were the proximate cause of the problem.

Mate, I don't work anywhere near the US of A. Nothing regulatory does effects me in that respect. The Brosnan pic was put up by the site owner (not me) since I refused to give one. We let it stay there mate as an inside joke.

Your stakeholder suggestion is, however, complete and utter bollocks since
(i) It's a vague and ultimately meaningless feel good term, that as I said is ridiculously easy to game;
(ii) You speak to mortgage brokers: what the fuck does your blithering on in response have to do w the obs that the same game that allowed the NoDocs to work would not allow the mortgage broker to game that.
(iii) In ordinary English investment firms refers to Funds, I Banks, etc.; they are many many steps removed from mortgage brokers and other pond scum.

Your suggestions are at best incoherent if not utterly idiotic. Stakeholders is empty feel good bollocks. Proper oversight on underwriting standards, not letting balloon leakages such as unsupervised brokering of loans, and just plain good lending practice (perhaps with a tighter regulatory eye, not written standards one can game, but good old inspections) on underwriting practice and lender policy tying back lenders comp to 3-5 yr portfolio performance.... Old good proven practice without getting into meaningless get a fucking lawyer to insert some blither into a statement stakeholder rubbish.

And btw, my suggestions would cut real gaming of risk rather more than the stakeholder fuzzy thinking.

I'll begin with (iii): I realize we colonials are unworthy of your overly generous consideration, but in American English "investment firm" means precisely what I previously wrote it means. (I can provide further links in evidence should it be necessary.)

Moving on to (ii): any market, regardless of its organization, is open to gaming. You offer some good suggestions as how to minimize its occurance in the mortgage market through better oversight on underwriting standards and tying lender compensation to the longer term performance of their loans. But there are already laws on the books providing for oversight and the lending industry would fight the latter proposal tooth and nail.

Why are existing laws unenforced and further regulation opposed? Because the prevailing business culture handsomely rewards regulatory capture. The current crisis is a poster perfect example of how externalities can run amok when business controls the regulatory system, if not the government itself. Estes argues that by considering the interests of non-participants (read stakeholders), potential external costs (in this case the cost of having to deal with the existence of the Big Shitpile) would be accounted for more accurately and upfront within market activity itself and market failure would be less likely to occur.

(Oops, there I go again using namby-pamby concepts like business culture. Regardless, every business has its culture which determines, in part, how it conducts its affairs. For instance, the picture on your blog provides insight into the business culture in which you operate, though since you are undoubtedly an international man of mystery I wonder if this photo wouldn't be more appropriate.)

Which leaves(i): Taking stakeholders into account when determining corporate governance is not a necessarily "vague and ultimately meaningless feel good" proposition. You obviously haven't read Estes' book. He addresses the issue in depth and with insight. His first prescription, for example, would be to institute greater transparency in transactions, something to which I assume you'd agree. His full program would not be easy to put into practise obviously, not in small part due to resistance from Randians, er, "moderate libertarians" like you. You should take comfort, however, in the fact that the chances of this type of reform being enacted in the US are extremely low.

Nevertheless, Estes' analysis of how business is done and how it might be done better is relevant to the discussion at hand. While one may not agree with his view, your willingness to dismiss his proposals out of hand in the manner you do betrays a telling level of pretentiousness and wetness-behind-one's-ears. (Yeah, how dare I! You'll have me know that you have dozens of months of experience in finance, speak more than one language fluently, possess a superior intellect and an undeniable savoir faire, blah blah blah, yadda yadda.... It's all there for the world to see. I bend in obeisance before you oh Great One.)

Meanwhile, have another martini--shaken, right?