[quote=TheBreeze]For those of you who like to rely on experts, Bill Black is an expert from the S&L scandal and he disagrees with the policy of bank zombification:
It’s a half-hour interview, but there’s so much good stuff in there it’s well worth listening to. His comments on zombification start at about the 20-minute mark.
[/quote]
Calculated Risk posted a part of this interview that I want to comment on:
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BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you’re saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.
BILL MOYERS: So you’re suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?
WILLIAM K. BLACK: Yes.
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OK, I like Bill Black, but… this kind of overstating of one’s case just makes his other reasonable points look dubious.
To use a specific example, does anyone really believe that Kerry Killinger at WAMU willfully told his crew to go out and underwrite bad loans so that he could get a bigger bonus? When he held millions of shares of WAMU’s stock that dwarfed his cumulative cash compensation? Please! That’s insane. (The same argument could be made about Mozilo and lots of others.)
Yeah, a lot these folks fell asleep at the wheel. And, yes, there were a lot of misaligned incentives and they chased a lot of business that they SHOULD have known was bad. But I don’t think there was a lot of willful fraud in the executive suites of these crappy companies. I think it was just stupidity combined with reckless risk-taking. I guarantee you that in most of these executives’ heart of hearts, they thought things would turn out o.k. with most of these loans. By and large, they just didn’t know any better. And I guarantee that the vast majority – with 20/20 hindsight – would have acted much differently. They would have taken much lower cash payouts in exchange for keeping the companies alive. I think most of the fraud was at the middle and lower levels because these folks weren’t owners – they took the money and ran. Although the senior execs should have known better and certainly didn’t do a good job of aligning incentives or managing their enterprises, I don’t think there was a lot of out-and-out fraud. In general, they lost too much – even adjusting for their cash comp – for that to be the case.
Dummies? Yes. Bad managers? Yes. Reckless? Yes. A system of bad incentives for employees? Absolutely. But evil Madoff-like fraudsters that willfully ran a Ponzi scheme knowing it was going to blow up? I don’t buy it.
