The Red Brick Times

Excerpt for an interesting New Republic article:

Banking was once a dangerous profession. In Britain, for instance, bankers faced "unlimited liability"--that is, if you ran a bank, and the bank couldn't repay depositors or other creditors, those people had the right to confiscate all your personal assets and income until you repaid. It wasn't until the second half of the nineteenth century that Britain established limited liability for bank owners. From that point on, British bankers no longer assumed much financial risk themselves.

In the United States, there was great experimentation with banking during the 1800s, but those involved in the enterprise typically made a substantial commitment of their own capital. For example, there was a well-established tradition of "double liability," in which stockholders were responsible for twice the original value of their shares in a bank. This encouraged stockholders to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on those who managed banks. If they fared poorly, they typically faced personal and professional ruin. The idea that a bank executive would retain wealth and social status in the event of a self-induced calamity would have struck everyone--including bank executives themselves--as ludicrous.

Read the whole thing here.
Posted 5:49 PM by whatley (5) comments

       Comments:

Here ! Here !

Balanced rationality is the key.
Risk without reward is saintly but not something you will find in the hyper-materialistic culture we live in. Risk without ENFORCED personal consequence is the balancing weight that is missing in the financial sectors.

Lack of consequence is akin to 'insanity' defense in the law. We seem to be conceding that the banking sector is, but definition, insane and therefore cannot be held responsible.

One point the article did not address and I feel is relevant as well is the status of a corporation as a entity, an entity without morals, ethics or intelligence yet possessing the powers and rights of a real person to enter into contracts, accrue benefits, seek protection under the law. Yet a corporation is not explicitly a real person, it is a legalistic definition of a conspiracy to make a profit while limiting the loss consequences to whatever assets are directly committed to the corporation's officers to manage. The contributors are shielded because they have to NO DIRECT role in the management and use of the contributed assets. Sounds reasonable but who is responsible?

Shouldn't then the officers, acting as the moral, ethical and intelligence actors behind the facade bear the consequences of their failures? Or are they not responsible because they are 'insane' because they cannot distinguish between right and wrong?

Perhaps the remedy for corporate officers who act recklessly, irresponsibly, carelessly and without prudence should be the same as for an individual declared 'not guilty by reason of insanity'. Perhaps we should commit them to psychiatric hospitals where they can get the needed therapy to return them to rationality.

# posted by  jeichenlaub : September 10, 2009 8:16 AM
 
Fuck that. Let's lop off their heads.

# posted by  whatley : September 10, 2009 10:39 AM
 
Robespierre would certainly approve, though in the end it ended badly for him.

# posted by  jeichenlaub : September 10, 2009 5:05 PM
 
But wait, the culprits that managed our economic demise are still receiving bonuses. Who's crazy?

# posted by  Ray : September 11, 2009 6:39 PM
 
Bonuses are paid either employment agreements. For the highest executives this is managed by the Board of Directors Compensation Committee. A bit lower down the food chain it is included in the performance evaluation processes for an individual, division, or overall profitability taken from the corporate financial statements.

Which leads me back to my point, the BoD are acting in a direct management role determining the distribution of assets. They are responsible for forming the agreements that 'separate' performance reward and performance penalties from the realities of fiscal operations. It is they who have allowed 'insane' agreements to exist.

We, the investors, have only one opportunity to influence who is on a BoD: the annual stockholders meeting. But 'votes' are tied to the number of shares owned and large stakeholders can and do easily overwhelm the vote of small stakeholders unless and until the small stakeholders form a coalition voting block.

In short, it is a stacked game favoring the large stakeholders who are more and more frequently the very executive being awarded bonuses and other corporations who hold large block of shares, like mutual funds, investment banks, etc.

While it seems reasonable to tie executive compensation to share ownership (stock options) in order to incentivize them to build share equity, it creates an suspicious, if not untenable, conflict of interest.

At heart of this mess is many of the issues raised by Ralph Nader in his campaigns against the legal hegemony of artifical entities.

# posted by  jeichenlaub : September 12, 2009 9:33 AM
 
Post a Comment


---