Stop the “heads I win – tails I’m bailed out” syndrome!

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.

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.
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.

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)

9 thoughts on “Stop the “heads I win – tails I’m bailed out” syndrome!

  1. A flat tax of 11% of ALL Americans would bring in more money to the government that they are bringing in today – but of course we would tick off a ton of liberals who now reside in their parents’ basements. But at this point if something is not done to reign in spending and taxes we will all be living there.

  2. Too bad very little will change over time. Only few less banks for a while, a lot of people out of work, and 401ks taking a beating. Only 106 banks have gone under since the outset of the downturn, as the FDIC is succeeding in bleeding them out slowly so as not to raise any further "concern"-HA!. New and larger banks will buy up the assets of the ones being liquidated and on with the cycle again. No real regulation has been installed since the crash of the market/economy, nor do I think anything meaningfully different will be put in place. You will hear a lot of banter about change but on the whole, banks, hedge funds, mutual funds, and the speculating community in general will be allowed to do its worst again in time.
    This is the most perfect example of the rich stealing from the poor you will see in a very long time(beside taxes in general), via Capitalism and facilitated by government(x- Wall Street gents that have made a living beating the system)

  3. Well, said! The GREATEST 3 card monty game ever played by Wall Street. You thought Madoff was pretty slick, see Hank Paulson(x-Goldman guy, licking his chops in office, power=money). Conspircacy theory here: all the heads of the major brokerages were in on it together, Hank knew he could trick Congress into writing TARP checks when the bubble popped, so these firms(BS, LEH, MS, WB, AIG) simply ramped up leverage and MBS(causing housing bubble)as they were printing money for 4 years. (continued)

  4. …(continued)
    However, I don’t think that tighter regulation should stop with the banks. Governments should also be subject to the same level of regulation that applies to commercial business. Europe and the US, in particular, has had far too many years of wasteful government spending on all manner of schemes, resulting in constantly mounting deficits. A commercial company engaging in the same lack of fiscal discipline would be liquidated. We need to stop governments from engaging in such “pork barrel politics” and hold them equally accountable for their actions.

    Perhaps the subject of a separate article?

  5. I couldn't agree more, Catarina.

    The way that these banks operate at present is capitalism gone mad!

    How can we view as reasonable a situation where people are paid such massive sums of money for engaging in extremely risky practice, at no risk at all to themselves? The fact that they are viewed as being too big/strategic to fail and so can rely on taxpayers bailing them out (and continuing to pay their outrageous bonuses) when they make bad calls is ridiculous. Those that have received any taxpayer funding at all should be compelled to provide sufficient bonus payments to the central fiscus to not only give taxpayers a decent return on the funds they “invested” in bailing the companies out, but also to penalise those bankers for taking the bonuses in previous 3-5 years that were based on the unsustainable business they did during that time. The fact that the banks want to pay bonuses to stop the bankers leaving those institutions makes no sense, either – if they were any good, they wouldn’t have landed the world in the mess in the first place… Let them go, I say. (continued…)

  6. This is a nice article and should be sent to all those big executives in all those big fancy banks, who are acting as if nothing happened, who went crawling to Washington for help. In that way the Indian Banks who are governed by the government are much better. At least they do not need to beg, borrow, and steal in order to survive.

    1. Interesting point. Considering what happens with banks in Sweden where the government owns a big chunk though, I’m not keen on state owned banks. They get bailed out by the taxpayers just like any other bank. In fact they act like the banks on Wall Street.

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