May 24, 2011
I’m writing because my family and I were affected by the economic collapse of 2008, and we don’t want it to happen again. As a result of the collapse, and directly as a result of the banks' poor lending practices and debt swaps, I am in the process of losing my home, which depreciated in value by nearly 50%. Yet, even as my home continues to lose value, as it becomes more and more "underwater," and as I face losing it as a result, bank execs are paid record amounts in bonuses. Bonuses for what, exactly? Certainly not for actual performance
Wall Street greed and outrageous pay practices were a major cause of the collapse. One way to change the incentives so they don’t collapse our economy again would be for regulators to use a *safety index* for incentive compensation, instead of a profit index.
Currently, most bankers receive stock options. So if they can generate more profits, the stock price goes up, and their options become more valuable.
Instead, what if they used the bank’s bond price, which measures the overall ability of the bank to repay its own debt? Another measure of bank stability is the spread on credit default swaps (the insurance-like policies that are essentially bets, where one gambler bets with another that a particular firm will fail). The closer a bank comes to failing (such as in failing to pay of its bond debt), the bigger the spread on credit default swaps.
Thank you for considering my comment,
Michael Losoff