Do Yourself A Favour - Get Rid Of The Bonus System

Image by Barrybar via Flickr

First, let me make a few things absolutely clear.

• If you are a fully private company, and you deem an employee worth trillions of dollars and are willing to pay that employee trillions of dollars in any shape or form - as long as you and your company are not infringing upon society - then I support the right of PRIVATE COMPANIES to pay their employees as much and in what manner they see fit.

• If you - as an individual - are some kind of specialist, I support your being worth more than mere mortals like me. So, for example, if you are an oncologist who has never lost one single cancer patient, I say you deserve the world. Not being sarcastic, you do deserve the world. Not to equate a human life with money, but if you are a specialist in the financial sector - like say a derivatives trader - and you make lots of money for the system so we can all have more money, then sure you deserve to make lots of money. But all professions have sanctions. Doctors lose their licenses because of malpractice, accountants lose their licenses because of irregularities, lawyers get disbarred over ethical issues, etc. And mere mortals like us, lose our jobs. NOW: Who makes more money and get "bonuses' when they destroy their own company, their own industry and the entire global financial system and the entire global economy? People in the financial sector, that's who! Is there something not radically wrong with that?
  

I am insulted to hear anyone say that this matter of bonuses is a "perception" problem and immaterial in the scheme of things. Oh no - I beg to differ. It is the very HEART of the problem.

• Make tons of money, please do. But if you make a mess, you have to pay for it. The rest of society is structured that way.
  

• Make lots of money in a private company, please do. But when taxpayers funds are involved, the rules are different. Taxpayers need healthcare, roads, education etc. There is not enough money for the things taxpayers funds are supposed to do. There is record deficit and record debt. So where is the money to reward people who made a mess? Sorry, that is not on!

Now, I've heard some things today that warrant comment:

• "The only people can fix this mess are the ones who made it, so you can't afford to lose the talent". Rubbish. This is a perverse incentive. You want someone to fix something, you pay them on the basis of how long they take to fix it. The longer they take, the less they make. And they definitely don't make a "bonus"

• "A bonus is just the way it is". Wrong again. A bonus is defined - as in the dictionary - as extra, something earned. The very first synonym listed is "reward". You cannot make a mess and be "rewarded" for that. Have we all lost our minds?

• "These are contracts". Now I am a stickler for the law. If these are contracts, and they are so airtight that they cannot be broken, then these lawyers are the most valuable legal minds in the world. They should be the ones who sue the AIG recipients for a share of the "bonuses" because this legal work requires real talent. If these contracts were entered into after bailout funds were provided, then someone has done something really wrong - they have broken the public trust. And that should be exposed. Even if the "bonuses" are lost. Regardless, no more money for anybody without conditionalities - are the government lawyers sleeping?
  

Please, financial engineering is critical for a functional market. But if those who financially engineer don't try to meet us mere mortals - who cannot comprehend your value system - halfway, then the people and the Government are going to force a solution. And that means restrictions and over-regulation. And then everyone will lose. But at least, we, the mere mortals, won't be insulted, offended and outraged.

My Wish List - The New Global Financial Architecture

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If you have been following this blog, you would know I have a major bee in my bonnet.

If I could write every day about the need for a new global financial architecture, I would.

If I could spend all day designing what I have termed not just a new global financial architecture, but a stronger, more stable, more equitable and more sustainable global financial and economic system, I would.


But since I can't here's my very quick wish list, in no particular order of significance because they all are to me. By the way, this list is not meant to be comprehensive. Let's think of this as a good start.

1. In my ideal world, there is no abuse of power. Not by anyone. That's right.

• In my ideal world: Financial institutions do not abuse their power over anyone. Why? People depend on their banks - they trust them. Rather, let me correct myself. They used to trust them; and they want to trust them. Leading people astray into undertaking obligations they cannot manage, or selling them investments they do not understand is not only immoral, it is an abuse of power. What is that power? It is the power of information.

• In my ideal world: Regulators do not abuse their power, or make it up when they have none. Why? Regulators are to ensure the efficient and fair functioning of the markets. Because the cornerstone of functional financial markets is that people have confidence in the regulators even if they cannot have confidence in the institutions. People need to believe that there is someone or something or some institution charged to make sure their money and their investments are as safe as possible. So regulators have a responsibility to act predictably, transparently, within the confines of the law and regulations, according to the law and regulations and only constitutionally with due respect to people's rights.

• In my ideal world: Ratings agencies do not abuse their power. Why? Rating agencies are crucial for functional markets. As we see, the whole world can spin on their advice. So that advice MUST be based on reasoned technical assessments in a transparent process that is supervised. They are to be supervised by an independent body comprised of representatives of different countries from the developed and the developing world. Respectfully, that institution cannot be the IMF or any of the other multilaterals. Independent ratings agencies must be independent from the financial sectors and companies they rate, independent from the IFIs and independent from the influence of any one individual or country. They must be independent of their perception of their own self importance.
  

2. In my ideal world, there is mandatory financial education for everyone - in every country. Why is this important? Because people must understand 1) how to manage their own money 2) what affects their money and the value of their investments 3) how to question all the financial advice they get. In my ideal world, financial education would start at kindergarten and be mandatory at every level through to the end of college. I am totally serious. Think about it. You need money all though your life, and you need to be able to manage your money all through life. So why don't you have access to financial education the same way you learn to read, or do arithmetic, or learn spelling and grammar?

3. In my ideal world, financial education must be funded by the financial sector, but not conducted by the financial sector. That's right. I'm probably alone here but I think that the financial institutions should fund an independent foundation that finances the school education project in 2. above as well as public education initiatives through the media. I completely support their right to makes lots of money. But to whom much is given much is expected. So, the more exotic you get with the financial engineering, the more money you should be required to provide to the foundation. You do plain vanilla banking in a conservative manner - then you get to pay less. This fund should be an international fund under the auspices of the United Nations. There are loads of ways to determine fair allocation - I could write a whole paper on how the fund should be financed and how it should function to make it fair for all people in all countries. Talk about a dream job! By the way, this kind of remedy is not unprecedented. Back in the early 2000s, the SEC made Wall Street pay for financial education for investors after they - Wall Street - made another mess, albeit minor compared to this. Check the history.

4. In my ideal world, the free for all is over. There are to be product limits, effective regulation, transparency, supervision and audit. It is beyond my comprehension that any type of financial product could be sold in such sufficient quantities that the market for any one type of financial product could exceed the GDP of the entire world. Really, did anyone think this was sustainable? Seriously, Credit Default Swaps - one type of Credit Default Obligations - exceed the GDP of the whole world. Insane. No more of that. Traders et. al. have all admitted that no one knows who even owns what. Are they kidding? No more of that. We need clearing houses, proper records, proper accounting, proper auditing and STRONG incentives to remain compliant. Yes, I did write incentives. Why? We've tried sanctions - people either don't care, or they are just not working or strong enough. People need to understand that the world is interconnected and it is in their "enlightened self-interest" for their own survival to act responsibly and build a sustainable system. By the way, everybody - yes, absolutely everybody - who takes or trades or engages in a transaction with even one cent of someone else's money gets regulated. Different levels of regulation for different players, I agree. But as long as you want to participate in the financial sector, you must agree to have a second pair of eyes - regulators - have a look at what you are doing. No ifs ands or buts. And no, I do not support overregulation. And yes, I made the abuse of power - by regulators - a big no-no. But there is no way I can support people doing whatever they want with other people's money. No more of that.

5. In my ideal world, the world's best universities lead the actual design of this stronger, more stable, more equitable and more sustainable global financial and economic system. Hey, this is just my wish list. Universities have studied this and are studying this. There are tons of experts. We need a year of structured seminars with working groups and working papers . THIS is something the IMF can host - because it has money. Bring in the practitioners, but don't give it to them to design. We are well overdue a balance between the public interest and the private interest. We are well overdue a balance between the bankers and the non-bankers. And we are well overdue a balance between the general public and all the various players in the financial sector - including the institutions, regulators and the rating agencies.

6. In my ideal world, international cooperation is effected by treaty with domestic legislation enactment. I hear and support the G20 in the very good and noble intention to have greater clarity and yes, control over what happens in the financial cyberspace. But realistically, one body to regulate everyone is just unlikely to happen. The reasons for that is really worthy of a book. Volume I would have to cover politics and political history just for context. However, it is possible to have international treaties with domestic legislation for enactment - you know, everyone agrees it is in their mutual interest to play by a certain set of minimum rules (to be decided), and that the local domestic regulators would enforce same, and that these local domestic regulators would meet frequently and talk frequently. This route is more possible than a super regulator for everybody. Further, having the IMF as that super regulator would require MAJOR reform of the IMF, and even the IMF has admitted that.

7. In my ideal world, we have a "grownup" - a super stablizer body comprised of membership from the developed and the developing world. How do I explain this? We cannot go through this again. We need some "body" whose job it is to keep an eye on everyone else. Not a regulator, but some kind of independent watchdog group. Maybe the media can form a partnership with some prominent NGOs. Maybe we should start a new NGO. Whatever or whoever, but here's what this body must do:

• Some "body" to make sure all the powerful people and parties do not abuse their power - and expose them if they do
  
• Some "body"to make sure mandatory financial education is taking place, and if it is not, then expose that
  
• Some "body" to make sure the foundation is funded and is funding what it is intended to fund, and expose the financial sector if it does not make it's donations, and expose the foundation if it is not doing what it should
  
• Some "body" to make sure the free for all is over, and expose anyone getting back into the reckless behavior with no limits, no or limited audits, no or limited regulation, no or limited transparency, no or limited supervision
• Some "body" to make sure the universities lead the design of this stronger, more stable, more equitable and more sustainable global financial and economic system, and expose them if they get off track
• Some "body" to make sure domestic regulators are keeping their commitments with regard to the treaties, and expose them if they don't
  

If it were up to me, this is what I would do.

What's The Real Objection To Assessing The Nationalization Option?

Image by Mike Licht, NotionsCapital.com via Flickr

Nationalizing the US Banks? Now, just now, people want to talk about this?

Read the Article at HuffingtonPost

If the objection is based on "we, don't like the idea of it", well, that is just not good enough in my humble opinion.

The banking sector must function in order for the rest of the economy to function, and the rest of society for that matter. The US and the world cannot continue on this path of "we hope these interventions will work". The interventions may have prevented a complete free fall, but the banking system is not working as it is intended to do - support the growth and development of the economy.

Here's where I'm confused though. Are Republicans going to be in favor of it - like Senator Graham in this video - and then not vote for it just because? Are Democrats going to not vote for it because the banking lobby is probably one of the strongest?

Real options must be considered realistically - not with ideology but in the harsh cold reality of today considering the US and the US' position in the world.

What's a brief - very very brief - nationalization if it gets the economy back on track quickly? Or would everyone prefer the US economy to continue to sputter until it cannot go on anymore at all just so lawmakers can say "Well at least we didn't nationalize". What would be the point of that since if there's no economy, there would be no point of having lawmakers, would there?