The Human Factor
Dean Baker, an economist I respect, linked to this outstanding NY Times article on the fall of Citibank. Its must-read paragraphs are many, but here is what I consider to be the bottom line:
"While the sheer size of Citigroup’s C.D.O. [Collateralized Debt Obligations] position caused concern among some around the trading desk, most say they kept their concerns to themselves.
“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”
To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.
Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities.
In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.
And the following paragraphs from the article are interesting from the perspective that says President-elect Obama may not want too many further dealings with former Clinton Treasury Secretary Robert Rubin:
Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.
“Chuck Prince [Citibank's CEO] going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’”
As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response.
“I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily.
Amazing how much in billions these guys were paid and how, after the crash, they all want to tell us how out of the loop they were, or how much they really didn't know. It's interesting how the human factor of friendships, arrogance, greed, inertia, denial and the difficulties in changing slow-moving bureaucracies remains a consistency in any bubble situation, whether it was the South Sea Company Bubble or the early 2000s Housing Bubble. Personally, these executives and directors at Citibank are walking exhibits for the proposition that there should be a maximum income limitation at some level. Maybe if they'd be forced to think about limits of how much they earned, they would be more inclined to think about the limitations in, or risks to the company's quarter profits from risky ventures that Warren Buffett said even he did not understand. He said the derivatives or credits were of "mind-boggling complexity" and said they were likely to become "financial weapons of mass destruction." Yet, Buffett's own company still pursued investments into the same ventures.
Final comments: When we think about it, we have limits facing us human beings in nearly everything we say and do. Almost always, we agree with the proposition that too much of a good thing is not good. Therefore, a society is well advised to set limits on how much money people make, just as it sets a floor of minimum wages. For libertarian types to sophomorically ask, "Where do you draw the line?", as if that means we should not draw any line, it is quite obvious that legislatures are capable of drawing lines that are livable and practical--and still provide people with an incentive to take risks to build enterprises.
For the status that comes with being an executive is often missing from most policy and economics-oriented discussions, to take one non-economic incentive. As for a specific maximum income, we can start what you'd win in the Publishers' Clearinghouse lottery, i.e. $10 million. At that point, we can have a party for you and say, "You won!" And you can then start to think about doing well for society. Imagine the better politicians we'd be likely to have...If you make more money after that, you can stash another $5 million in a federally controlled bank in the form of a bond, and that will help you if you become a drug addict or wastrel. If you blow through that, maybe you need to spend the rest of your days in community volunteering and living on a welfare or Social Security stipend. Really, though, you can do what you want to do, but money-wise, you're Gary Busey at that point, aren't you, and probably living on welfare anyway?
The yacht industry may also be hard hit under this proposal, but really, I think we can take that chance, don't you?