|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
There should be financial accountability for the man who led Bear Stearns as it gorged on dubious subprime securities to boost its profits and share price, helping to set up one of the biggest financial collapses since the savings-and-loan crisis in the 1980s. Some might argue that he should have lost it all.
But that’s not how it works. The ongoing bailout of the financial system by the Federal Reserve underscores the extent to which financial barons socialize the costs of private bets gone bad. Not a week goes by that the Fed doesn’t inaugurate a new way to provide liquidity — meaning money — to the financial system. Bear Stearns isn’t enormous. It doesn’t take deposits from the public. Yet the Fed believed that letting it implode could unleash a domino effect among other banks, and the Fed provided a $30 billion guarantee for JPMorgan to snap it up.
Compared to the cold shoulder given to struggling homeowners, the cash and attention lavished by the government on the nation’s financial titans provides telling insight into the priorities of the Bush administration. It’s not simply a matter of fairness, though. The Fed is probably right to be doing all it can think of to avoid worse damage than the economy is already suffering. But if the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.
Financiers, of course, dispute that they are being insufficiently penalized. “I received no bonus for 2007, no severance pay, no golden parachute,” E. Stanley O’Neal, the former chief executive of Merrill Lynch, told a House committee recently. That doesn’t seem like much of a blow to Mr. O’Neal, who was removed earlier this year following gargantuan subprime-related losses.
Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless — or not, if the Fed feels it must step in. But as a rule, they won’t have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.