Another recent post from the ongoing discussion of Herb's latest piece on Marketwatch, which gets to the crux of how so much garbage could have gotten into the system, and how the supposedly smart people running the banks could have allowed so much of it on their books:
Unless they commit actual crimes, the people making these decisions get to keep their huge bonuses even when it becomes obvious that the “profits” they generated were fleeting and easily reversed by events that all the auditors and rating agencies said were unlikely.
As one of the other writers on [Marketwatch] pointed out recently (sorry can’t find it), the problem would go away if guys like Chuck Prince had their huge bonuses and stock options put in escrow for five years, with a condition being that they forfeit the entire amount if there are any later material restatements, corrections, etc. to the “results” that drove the compensation in the first place.
Unfortunately, as Herb has pointed out often here, the notion of corporate governance has gotten completely out of control. Insiders rob the shareholders blind, then are allowed to retire with their full packages and keep their loot. They have no incentive to care about the long-term future of the organization they work for, so long as they have a locked-in retirement package they will always do just fine.
Unfortunately, the powers-that-be continue to reinforce this state of affairs.
The SEC apparently feels that allowing mere shareholders (the people who own the company) to have a voice in who is on the board of directors is unnecessary. The directors continue to be chosen by and owe their allegiance to the hired managers who they are supposedly supervising. The managers feel free to spend shareholders money on endless studies justifying their own exhorbitant compensation and severence packages, even when their records are like Chunk Prince's and Stan O'Neal's -- complete failures.
Until boards of directors have to answer to the actual shareholders, and managements are reminded that they work for the board, not vice-versa, these problems will continue to crop up.
It's a larger symptom of bigger problems. The fix won't be easy, nor will it come in good times.
-btc
