May 31, 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.
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.
It is outrageous enough that Wall St. and the big banks ruined the economy, destroying our nation’s financial security, putting millions out of work, and much more damage by means of their greedy, self-serving fraudulent schemes. Furthermore, they then based their disgracefully overblown bonuses not on actual value produced for the nation, but only on the faked monetary through-put they could appear to generate.
But it is doubly outrageous and unsupportable that they be allowed to continue the practices that led to the melt-down, only making a terrible financial crisis even more inexcusable. The Federal Government simply MUST redeploy new regulatory mechanisms and re-engage its present ones to rein in these predatory institutions of all types before they are allowed to destroy totally the national and world economies.
Ordinary citizens engaging in these practices would have long since landed in jail. Many of these people and institutions should be faced with serious prosecutions, facing punishments with real teeth, not just wrist-slaps. The dangerous and outrageous behaviors will only continue and worsen if criminal probes are not undertaken, and do not result in genuine, severe and appropriate penalties for all malfeasance.
IF THESE PRACTICES AND REWARD SCHEMES ARE ALLOWED TO CONTINUE, THE REGULATORS AND REGULATORY AGENCIES WILL BE JUST AS GUILTY OF THE ENSUING DISASTER AS THE FINANCIAL CRIMINALS THEMSELVES.
Thank you for considering my comment,
Dr. & Mrs. Carl R. Stannard
Johnson City, NY