Daily Archives: February 4, 2010

Let Banks Choose: Bonuses or Bank Charters?

L. Randall Wray

Now here is the best idea we have seen yet. Britain’s Financial Services Authority has come up with the ultimate response to bank claims that they must pay high bonuses to the geniuses who caused the crisis. Just as Timmy Geithner claimed, while trying to protect his Wall Street handlers, UK banks always say that contracts are contracts and so no matter how repulsive it might be, they have to pay out bonuses as spelled-out in their contracts. The FSA said fine, go ahead, but if you do you will lose your license to do banking in London. In other words, it is the bank’s choice: be a bank, or pay bonuses. You cannot have it both ways (see here).

So here is the deal. President Obama should direct his administration to offer our bankers the same choice: either forgo all bonuses until the US unemployment rate drops below 5%, or lose your bank charter. Indeed, he should go further. Banks are really public-private partnerships, and bank management and other employees should not receive pay in excess of civil servant pay. Assign the appropriate civil servant pay grades to our regulated and protected banking institutions. Any banks that wish to pay higher salaries than that to retain “rocket scientists” can do so, but they will give up their bank charters. They will slip into the dark “shadow banking” sector and will lose all access to government protection.

Then adopt a strict version of the Volcker rule. Should any of those shadow banks find themselves in trouble, they will not be bailed out. Instead, they will be “resolved”—that is, shut down, with creditors paid whatever the government can recover on assets. If that rule had been in place two years ago, no more Goldman Sachs. Instead, Goldman was handed a bank charter, which allowed it to stay in business, to hoover up manufactured profits, to manipulate government policy, and to pay out bonuses using government bail-out money.

As to the complaint that banks will not be able to retain all the geniuses that helped to create the crisis, Obama’s response ought to be: Goodbye and good riddance. Go find jobs in the Caribbean. Banking does not need rocket scientists. It is basically a simple business: assess credit worthiness, make loans that have a high probability of repayment, and issue deposits. It used to be known as the “three-six-three” business: pay three percent on deposits, charge six percent on loans, and hit the golf course at three p.m. That was good banking and it did not need high remuneration. Tens of millions of Americans bought homes, started businesses, and sent their kids to college. It was good enough.

Herr Henkel’s Hall of Shame

By William K. Black

Hans-Olaf Henkel was one of the primary German architects of the global financial crisis in his capacity as leader of the association that lobbied on behalf of Germany’s large businesses. He has written recently that a number of the CEOs running those businesses should be placed in a “Halle der Schande” (Hall of Shame). One hopes that he will find his continued association with them congenial when he his given the most prominent pedestal in that Hall.

Herr Henkel was the leading German business proponent of deregulation and the executive compensation systems that drove the global crisis. He brought a special passion to denouncing German tendencies toward social equality and the resulting cultural limitations on executive compensation. The government and equality were the twin evils and when the government sought to increase equality the combination was Henkel’s ultimate nightmare. It was certain, therefore, that he would blame the global crisis on government efforts to reduce discrimination against working class, particularly minority, Americans. It was equally certain that he would be enraged when Professor Galbraith refuted this claim. Herr Henkel replied:
Mr. Galbraith should familiarize himself Jimmy Carter’s “Housing and Community Development Act” where in Section VIII Banks were prohibited the practice of “red lining” which until then enabled them to distinguish “better living quarters” and “slums.”

It is not common to read nostalgia about the good old racist days when the government (the FHA) and businesses worked together to prevent loans from being made to blacks. Herr Henkel has an interesting concept of causality. His “logic” is that blacks, not the denial of home loans, caused “slums.” Banks, naturally, did not loan to blacks because blacks lived in slums. They drew “red lines” on maps around “slums” where they would not lend. Then came what Herr Henkel terms the “do-goodism” among politicians that banned the red lining of integrated and black neighborhoods (aka, “slums” in Henkel’s world view). The Fair Housing Act of 1968 (passed under President Johnson) outlawed redlining. Under Henkel’s “logic” it, after over a 30-year latency period, caused the global financial crisis. Black borrowers (“slum” dwellers all) destroyed the global economy. And Jews caused Germany to lose World War I by stabbing it in the back.

But it gets better. Herr Henkel claims that he is on a mission to fight a blood libel. He is enraged that opponents of the disastrous financial system smear (Verunglimpfen) that system on the basis of the wrongdoing of the CEOs leading our most elite banks. This makes his casual, fact-free, smear of blacks all the more appalling and hypocritical.