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The latter has a certain appeal, but execution would be extremely complex, and given the kind of bubble mentality that we've seen again and again, it might have no effect. Besides, most top managers on Wall Street have been co-investing since the days of Michael Milken. And what are stock options but attempts to align manager and shareholder interests? The deeper problem is how to enforce accountability in very large, publicly owned institutions that have two large goals: reap speculative (and capital) gains and provide fuel, in the form of liquidity and leverage, for the real economy. My argument Monday was simply that it's hard to insure accountability because of the general sense -- which may or may not be true, but nobody really wants to find out -- that "speculative financial gains" and "fueling the real economy" go together. In other words, deep inside we believe that an economy with lots of liquidity sloshing around -- the kind of stuff that causes bubbles -- is really necessary to drive the economic engine. If that's true, any substantive limitation on risk-taking in finance -- taxes, regulation, tight monetary policies, alterations on the notion of limited liability -- produces the efficiency argument decrying its effects. That argument never really goes away. In Tuesday's New York Times, Andrew Ross Sorkin talks to Citadel Investment Group LLC's Kenneth Griffin, who blasts Wall Street and regulators for the crisis and suggests some reasonable reforms. But Griffin then cautions that too much regulation will send finance jobs overseas, a form of the efficiency argument that resembles Henry Paulson's precrisis notion that onerous U.S. regulation was only helping London beat up on New York. It seems to me hard to imagine effective regulation that doesn't involve some limitation on risk. Another problem with our current notion of accountability is that we have no clue how individual behavior is really shaped. One man's $10 million is another's $100 billion. Jimmy Cayne lost a lot of money in the so-called bailout, but he still has that Plaza apartment and enough to golf happily for years. For someone like Cayne, or his old buddy Ace (er, Alan) Greenberg, both of whom took money out of the firm for decades, there's really no obvious means of ensuring accountability -- of guaranteeing prudence or care -- short of jail time. And criminalizing financial failure would obviously have a dampening effect on speculation, risk and -- again, who knows? -- the real economy. Besides, if you criminalize the top end of the subprime chain, do you arrest homeowners who have lost their homes for the same, if more modest, kind of speculative flyer? These are extremely complex issues that open up twisting paths into questions of regulation, globalization, human psychology, politics. Reining in risk on Wall Street, and individual profits from risk-taking, is technically quite simple: tighten up on a firm's capital and limit leverage. That would do it. That would, of course, wither these firms like flowers in a dark room, and send thousands to private capital or to offshore havens. You can't forget that the Fed "bailed out" Bear believing that its destruction would cause harm beyond Wall Street and into the real economy -- hammering innocent and guilty alike. The suspicion here is that we offer up a variety of narrow schemes to incentivize greater prudence because of general frustration with a machine that feels out of control and because we sense that the underlying problem is intractable without fundamental changes we're afraid to make -- perhaps for good reason. Again, these firms embody a contradiction: the need for prudence, on one hand, the necessity to take huge risks on the other. Trying to erase one part of the equation or the other doesn't get us anywhere. - Robert Teitelman See DealBook column from The New York Times CategoriesComments
From: Michael Blomquist,
You provide an interesting argument if it was posted during the creation of the World's Biggest Bubble, but we are now faced with much more dire consequences. We can't unscramble eggs, but we should be able to prosecute criminals. The necessity of Cayne to participate in loan fraud does not compare to that of subprime borrowers. The need for a new gulf stream somehow does not compare with shelter or dreams of appreciation to compensate for stagnant wages. The consequences of Cayne's particpation was hundreds of billions in unjust compensation; consequences of subprime and other unqualified borrowers were destroyed credit, broken families, lost money, etc. These borrowers have already served a poetic sentence and will continue to do so for a long time. We are only in the first inning of a double header and things will get much worse if foreign investors lose all confidence in our markets. Foreign inflows have slowed to trickle I was about to say petty criminals, but even the sub-crime offenders are well beyond a "petty" threshold.
Posted on:
May 26, 2008 7:05 PM
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A few interesting comments came back on 
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It seems to me that part of the issue here is a function of IB's appetite for inceased capital that resulted in them becoming public entities. The increased capital available enabled them to make ever larger (and riskier) bets while the dipersion of risk from a few partners to a diverse shareholder base reduced the potential economic consequences for the firm's managment and employees. If Bear were a private partnership I'm not sure that the bet that was made would be as big, that Senior partners would be walking away as easily and that a bail out would seem to be so imperative.