Under deregulation the industry became dysfunctional-but economists still won’t revise their anti-regulation script.
William K. BlackThis article is from the November/December 2007 issue of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org
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This article is from the November/December 2007 issue of Dollars & Sense magazine.
The U.S. financial system is, once again, in crisis. Or, more precisely, twin crises-first, huge numbers of defaults among subprime mortgage borrowers, and second, massive losses for the holders of new-fangled investments comprised of bundles of loans of varying risk, including many of those subprime mortgages.
For more on the current financial crises, see Tom Palley’s article on the Fed’s failed paradigm, in this issue, and Larry Peterson’s web-only article about the subprime/securitization panic.
These crises should shock the nation. Our largest, most sophisticated financial institutions have followed business practices that were certain to produce massive losses-practices so imprudent, in precisely the business task (risk management) that is supposed to be their greatest expertise, that they have created a worldwide financial crisis.
Why? Because their CEOs, acting on the perverse incentives created by today’s outrageous compensation systems, engaged in practices that vastly increased their corporations’ risk in order to drive up reported corporate income and thereby secure enormous increases in their own individual incomes. And those perverse incentives follow them out the door: CEOs Charles Prince, at Citicorp, and Stanley O’Neal, at Merrill Lynch, had dismal track records of similar failures prior to the latest disasters, but they collected massive bonuses for their earlier failures and will receive obscene termination packages now. Pay and productivity (and integrity) have become unhinged at U.S. financial institutions.
As this goes to print, Treasury Department officials are working with large financial institutions to cover up the scale of the growing losses. This is the same U.S. Treasury that regularly prates abroad about the vital need for transparency. And a former Treasury Secretary, Robert Rubin, who failed utterly in his fiduciary duty as lead board member at Citicorp to prevent the series of recent abuses, will become Citicorp’s new CEO.
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