[Marxism] American socialism?

[Louis Proyect]

NY Times, March 21, 2008
Editorial
Socialized Compensation

How can one feel sorry for James Cayne? The potential losses of the 
chairman and former chief executive of Bear Stearns must rank up there 
with the biggest in modern history. The value of his stake in Bear 
Stearns collapsed from about $1 billion a year ago to as little as $14 
million at the price JPMorgan Chase offered for the teetering bank on 
Sunday.

Still, Mr. Cayne was paid some $40 million in cash between 2004 and 
2006, the last year on record, as well as stocks and options. In the 
past few years, he has sold shares worth millions more. 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.

Indeed, the pain that is being inflicted on financial-industry 
executives as a result of their own actions and decisions is not proving 
much of an encouragement. Rather, the knuckle-rapping seems only to 
encourage bankers to make up for any losses they may suffer by finding 
another way to navigate their companies, the financial system and the 
economy into the next maelstrom — from Internet stocks to what the 
industry calls zero-down, negative amortization, no-doc, adjustable-rate 
mortgages.

(Translation: derivatives based on incomprehensible mortgages with 
unpredictable interest rates given to people who have no reasonable 
chance of understanding them, let alone paying them back. )

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.

The costs of such a lopsided system of incentives are by now clear. 
Better regulation of mortgage markets would help avoid repeating current 
excesses. But more fundamental correctives are needed to curb 
financiers’ appetite for walking a tightrope. Some economists have 
suggested making their remuneration contingent on the performance of 
their investments over several years — releasing their compensation 
gradually.

That’s an idea worth studying. Certainly, trying to put specific limits 
on bankers’ salaries is a nonstarter. But until bankers face a real risk 
of losing their shirts, they will continue blithely ratcheting up the 
risks to collect the rewards while letting the rest of us carry the bag 
when their punts go bad.