To avoid repeating last year’s crisis, governments must find a way of making investors in financial institutions understand that they will lose money if banks fail. If not, there is no stopping the moral hazard of investors feeling safe believing that governments will always prevent major banks from collapsing.
As it is investors are lending cheap money to banks that often use it to make risky loans and trades, knowing that they will keep the profit regardless if their bets pay off or not. Executives on Wall Street know that if the deal goes wrong they just have to take their bonuses and move on. And the fact that they frequently have guaranteed compensation packages makes irresponsibility even more rampant.
And as if that wasn’t bad enough. Shareholders frequently get a return of zero. Am not surprised that bank employees are keen to earn as much as possible, but why do shareholders accept such a rotten deal? Bank of America’s executives may even face charges for failing to disclose Merrill Lynch’s mounting losses to shareholders ahead of the purchase.
How did we get to a stage where normal business practice, to use profit to replenish inadequate capital, reward owners and only then pay benefits to employees, has gone out the window?
Some senior people on Wall Street now warn that if the systematic risks of the industry aren’t addressed an even bigger collapse could be happening fairly soon.
The off-exchange derivatives market is still unregulated and banks are selling and trading them, regardless of the role they played a year ago. And if they are allowed to continue betting, backed by taxpayer guarantees, they will soon return to the kind of practices that made them underwrite trillions of dollars of bad loans.
Considering that G20 hasn’t yet done much to regulate banks, what can be done? “Living wills” is a way of making it mandatory for banks to plan how to handle a possible collapse so that depositors are protected while forcing creditors to take the losses. Another option is to force banks to finance themselves with a slice of junior hybrid debt. Obviously the best would be self-discipline. But that’s probably hoping for too much.
The risks taken by a few individuals on Wall Street caused the worst global recession since the Great Depression and many of the taxpayers that had to pick up the bills have also ended up unemployed, lost their houses and are in a mess that is not of their own making. Meanwhile the guys who caused the recession keep on earning a fortune and behaving as if nothing happened. It’s enough to make you understand why people become socialists. Makes me think of old-fashioned socialist posters portraying business owners making profit at the expense of the proletariat, just with the difference that it’s not the owners that are doing so, but the employees.
It’s really time for governments to put en end to the “heads I win, tails I’m bailed out” syndrome”. The minimum that can be expected is that the weak and reckless should be forced to shrink and live within their means and “Living wills” are implemented to protect depositors.
(Photo: Christopher Walker, Photo Xpress)