Posts Tagged ‘Limited-liability corporations’

“I’ll be gone, you’ll be gone”

March 15, 2011

A Wall Street money manager named Barry Ritholtz wrote a good article in the Washington Post about the IBGYBG management philosophy of so many Wall Street banking and brokerage firms.

IBGYBG is shorthand for “Let’s grab everything we can get now because I’ll be gone and you’ll be gone when everything crashes.”

I do not care what shareholders and their boards pay the people who create enormous value. … … On the other hand, many others received huge bonuses for bankrupting their firms and driving the economy into recession. Their job performance should be the subject of your ire and of regulators. They brought the world to the abyss of economic collapse because they had incentives to do so.

If that sounds unbelievable, consider:

– Subprime mortgage brokers who were paid based on the quantity – not the quality – of their mortgage writing. The loans lenders sold to Wall Street to be securitized carried a 90-day warranty. Hence, the brokers’ jobs were to find people who would make the first three monthly payments of a 30-year loan. After that, it was no longer their concern.

– Derivative traders who knew that what they were buying was going to blow up. In 2007, I published an e-mail from one such trader who wrote, “We knew we were buying time bombs.” The motivation was deal fees and bonuses. Once the derivative machinery was in motion, they had to “keep buying collateral, in order to keep issuing these transactions.”

– Collateralized debt obligation managers whose job it was to assemble pools of mortgages, yet had little or no understanding of the underlying loans. The salespeople, traders and managers working in the mortgage sector had incentives that were upside down. The greater the risk they took, the more they were paid. But brunt of those risks was on third parties, never themselves. It was shareholders and taxpayers who shouldered them.

This is backward. The people who should bear the downside are the ones who have the upside. Instead, the system was perversely one of private profit but public risk.

He named names:

l Lehman Brothers Chairman and CEO Richard Fuld Jr. made nearly a half-billion – $490 million – from selling Lehman stock in the years before it filed for Chapter 11 bankruptcy.

l Countrywide Financial (now owned by Bank of America) founder and CEO Angelo Mozilo cashed in $122 million in stock options in 2007.  His total take is estimated at more than $400 million dollars.

l Stanley O’Neal, who steered Merrill Lynch into financial collapse before it was taken over in a shotgun wedding with Bank of America in 2008, was given a package of $160 million when he retired.

l Bear Stearns former chairman Jimmy Cayne, rescued by a $29 billion Fed shotgun wedding to JPMorgan Chase, received $60 million when he was replaced;

l Fannie Mae CEO Daniel Mudd received $11.6 million in 2007. His counterpart at Freddie Mac, Richard Syron, brought in $18 million. In 2008, the two were forced into government conservatorship.

via Washington Post.

As Ritholtz pointed out, things weren’t always this way.  Once most Wall Street firms were partnerships, and the partners went into personal bankruptcy when their firms failed. Their mansions, yachts, automobiles and even their watches were auctioned off.  During the 1970s and 1980s, the big partnerships became public corporations, and the principle of limited liability meant that the owners were only on the hook for what they put into the firms, not for what they took out of them.

It’s not practical to turn the Wall Street firms back into partnerships.  Instead Rithholtz suggests legislation to make corporate executive personally responsible for reckless management and to claw back their excessive compensation.  I think that’s an interesting idea.  A better idea, in my opinion, would be to make the corporate decision-makers criminally liable for criminal actions of a corporation.