Fundamental drivers of our current economic problems

[CA renter]

Both are excellent posts. Agree 100% with this being the problem.

[davelj]

[quote=patientrenter]Incentives were indeed a very important part of the problem, and potentially a part of the solution.

But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.

Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.[/quote]

I don’t disagree with you. But… read your last sentence again in the context of incentives. Part of the problem is that institutional money managers aren’t incented to take governance issues seriously. If they were, they certainly would. Most institutional asset managers consider proxy season a nuisance because they have to keep track of proxies, the voting on which doesn’t affect how they get compensated. If their compensation was tied into governance issues, they’d take governance more seriously. And again we come back to incentives.

[davelj]

[quote=patientrenter]Incentives were indeed a very important part of the problem, and potentially a part of the solution.

But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.

Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.[/quote]

I don’t disagree with you. But… read your last sentence again in the context of incentives. Part of the problem is that institutional money managers aren’t incented to take governance issues seriously. If they were, they certainly would. Most institutional asset managers consider proxy season a nuisance because they have to keep track of proxies, the voting on which doesn’t affect how they get compensated. If their compensation was tied into governance issues, they’d take governance more seriously. And again we come back to incentives.

[davelj]

[quote=patientrenter]Incentives were indeed a very important part of the problem, and potentially a part of the solution.

But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.

Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.[/quote]

I don’t disagree with you. But… read your last sentence again in the context of incentives. Part of the problem is that institutional money managers aren’t incented to take governance issues seriously. If they were, they certainly would. Most institutional asset managers consider proxy season a nuisance because they have to keep track of proxies, the voting on which doesn’t affect how they get compensated. If their compensation was tied into governance issues, they’d take governance more seriously. And again we come back to incentives.

[davelj]

[quote=patientrenter]Incentives were indeed a very important part of the problem, and potentially a part of the solution.

But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.

Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.[/quote]

I don’t disagree with you. But… read your last sentence again in the context of incentives. Part of the problem is that institutional money managers aren’t incented to take governance issues seriously. If they were, they certainly would. Most institutional asset managers consider proxy season a nuisance because they have to keep track of proxies, the voting on which doesn’t affect how they get compensated. If their compensation was tied into governance issues, they’d take governance more seriously. And again we come back to incentives.

[davelj]

[quote=patientrenter]Incentives were indeed a very important part of the problem, and potentially a part of the solution.

But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.

Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.[/quote]

I don’t disagree with you. But… read your last sentence again in the context of incentives. Part of the problem is that institutional money managers aren’t incented to take governance issues seriously. If they were, they certainly would. Most institutional asset managers consider proxy season a nuisance because they have to keep track of proxies, the voting on which doesn’t affect how they get compensated. If their compensation was tied into governance issues, they’d take governance more seriously. And again we come back to incentives.

[patientrenter]

Fair enough, dave, and I would be thrilled if the incentives were changed in an effective way. But at this point, I’d rather just get the agents out of the way. I’d recommend that as a first choice, and if that cannot be made to work then work on the agent incentives. I’ve seen (and I’m sure you have too) endlessly clever schemes cooked up by agents to compensate themselves regardless of the real long term outcomes for the principals. It’s easier to set up your farm away from the swamp than in it.

[patientrenter]

Fair enough, dave, and I would be thrilled if the incentives were changed in an effective way. But at this point, I’d rather just get the agents out of the way. I’d recommend that as a first choice, and if that cannot be made to work then work on the agent incentives. I’ve seen (and I’m sure you have too) endlessly clever schemes cooked up by agents to compensate themselves regardless of the real long term outcomes for the principals. It’s easier to set up your farm away from the swamp than in it.

[patientrenter]

Fair enough, dave, and I would be thrilled if the incentives were changed in an effective way. But at this point, I’d rather just get the agents out of the way. I’d recommend that as a first choice, and if that cannot be made to work then work on the agent incentives. I’ve seen (and I’m sure you have too) endlessly clever schemes cooked up by agents to compensate themselves regardless of the real long term outcomes for the principals. It’s easier to set up your farm away from the swamp than in it.

[patientrenter]

Fair enough, dave, and I would be thrilled if the incentives were changed in an effective way. But at this point, I’d rather just get the agents out of the way. I’d recommend that as a first choice, and if that cannot be made to work then work on the agent incentives. I’ve seen (and I’m sure you have too) endlessly clever schemes cooked up by agents to compensate themselves regardless of the real long term outcomes for the principals. It’s easier to set up your farm away from the swamp than in it.

[patientrenter]

Fair enough, dave, and I would be thrilled if the incentives were changed in an effective way. But at this point, I’d rather just get the agents out of the way. I’d recommend that as a first choice, and if that cannot be made to work then work on the agent incentives. I’ve seen (and I’m sure you have too) endlessly clever schemes cooked up by agents to compensate themselves regardless of the real long term outcomes for the principals. It’s easier to set up your farm away from the swamp than in it.

[Allan from Fallbrook]

Dave: If you want to really underscore your point, set it in contrast to what the function of Wall Street is supposed to be: A means or mechanism to efficiently allocate capital where that capital will be most productive.

So how do we explain when all of that capital is egregiously misallocated and over a protracted period of time? I say, look to the compensation packages attached, especially the bonus structures, and it becomes patently obvious.

As odious as certain government regulations are and can be, a nearly complete lack of oversight only emboldened the various players further and deepened the effects of the crisis.

If you want an explanation of what is behind the agent/principal disconnect, look no further than pure, unfettered greed. Greed unhampered by oversight, regulation, ethics or simple common sense. It is completely impossible to have so much collective talent and business acumen so totally miss the obvious signs, unless they were incompetent, willfully ignorant and avariciously greedy.

There was no conscious sense of responsibility that these agents felt for their principals, anymore than the partners at Arthur Andersen Houston felt for the employees at Enron or the citizenry at large (CPA means Certified PUBLIC Accountant and you have an ethical and legal responsibility to act on behalf of not just your clients, but the general public as well).

House in the Hamptons, new Maserati, $2,000/hr escorts, cocaine, Cristal champagne and that custom made French yacht. Why be responsible to your clients when all those toys beckon?

[Allan from Fallbrook]

Dave: If you want to really underscore your point, set it in contrast to what the function of Wall Street is supposed to be: A means or mechanism to efficiently allocate capital where that capital will be most productive.

So how do we explain when all of that capital is egregiously misallocated and over a protracted period of time? I say, look to the compensation packages attached, especially the bonus structures, and it becomes patently obvious.

As odious as certain government regulations are and can be, a nearly complete lack of oversight only emboldened the various players further and deepened the effects of the crisis.

If you want an explanation of what is behind the agent/principal disconnect, look no further than pure, unfettered greed. Greed unhampered by oversight, regulation, ethics or simple common sense. It is completely impossible to have so much collective talent and business acumen so totally miss the obvious signs, unless they were incompetent, willfully ignorant and avariciously greedy.

There was no conscious sense of responsibility that these agents felt for their principals, anymore than the partners at Arthur Andersen Houston felt for the employees at Enron or the citizenry at large (CPA means Certified PUBLIC Accountant and you have an ethical and legal responsibility to act on behalf of not just your clients, but the general public as well).

House in the Hamptons, new Maserati, $2,000/hr escorts, cocaine, Cristal champagne and that custom made French yacht. Why be responsible to your clients when all those toys beckon?

[Allan from Fallbrook]

Dave: If you want to really underscore your point, set it in contrast to what the function of Wall Street is supposed to be: A means or mechanism to efficiently allocate capital where that capital will be most productive.

So how do we explain when all of that capital is egregiously misallocated and over a protracted period of time? I say, look to the compensation packages attached, especially the bonus structures, and it becomes patently obvious.

As odious as certain government regulations are and can be, a nearly complete lack of oversight only emboldened the various players further and deepened the effects of the crisis.

If you want an explanation of what is behind the agent/principal disconnect, look no further than pure, unfettered greed. Greed unhampered by oversight, regulation, ethics or simple common sense. It is completely impossible to have so much collective talent and business acumen so totally miss the obvious signs, unless they were incompetent, willfully ignorant and avariciously greedy.

There was no conscious sense of responsibility that these agents felt for their principals, anymore than the partners at Arthur Andersen Houston felt for the employees at Enron or the citizenry at large (CPA means Certified PUBLIC Accountant and you have an ethical and legal responsibility to act on behalf of not just your clients, but the general public as well).

House in the Hamptons, new Maserati, $2,000/hr escorts, cocaine, Cristal champagne and that custom made French yacht. Why be responsible to your clients when all those toys beckon?

[Allan from Fallbrook]

Dave: If you want to really underscore your point, set it in contrast to what the function of Wall Street is supposed to be: A means or mechanism to efficiently allocate capital where that capital will be most productive.

So how do we explain when all of that capital is egregiously misallocated and over a protracted period of time? I say, look to the compensation packages attached, especially the bonus structures, and it becomes patently obvious.

As odious as certain government regulations are and can be, a nearly complete lack of oversight only emboldened the various players further and deepened the effects of the crisis.

If you want an explanation of what is behind the agent/principal disconnect, look no further than pure, unfettered greed. Greed unhampered by oversight, regulation, ethics or simple common sense. It is completely impossible to have so much collective talent and business acumen so totally miss the obvious signs, unless they were incompetent, willfully ignorant and avariciously greedy.

There was no conscious sense of responsibility that these agents felt for their principals, anymore than the partners at Arthur Andersen Houston felt for the employees at Enron or the citizenry at large (CPA means Certified PUBLIC Accountant and you have an ethical and legal responsibility to act on behalf of not just your clients, but the general public as well).

House in the Hamptons, new Maserati, $2,000/hr escorts, cocaine, Cristal champagne and that custom made French yacht. Why be responsible to your clients when all those toys beckon?

[Author]

Posts