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October 19, 2009
Under the Buttonwood Tree
I attended the Economist Magazine’s First Annual Buttonwood Conference on Friday, which offered a perspective on the future of the financial services sector. The event could not have been better timed, given Goldman Sachs’ announcement that it would accrue a record $16.7 billion in bonuses for 2009, while Bank of America CEO Ken Lewis forfeited his 2009 compensation. I was one of the speakers on a panel on Restoring Trust in the Financial System. Here are key points made during the day:
1) Larry Summers, chief economic advisor to President Obama, said that it is not appropriate for government to set levels of compensation for bankers but it is entirely reasonable for government to have a voice in the structure and form of incentive compensation. “The system will work best if there is a new regulatory framework,” he added. “All financial institutions benefited from the government bailout. The banks and insurance companies were saved by the American taxpayer for the greater good, not their own good. This has created a new social compact between the financial sector and society. We do not have to bribe those responsible for the problems to accept a consumer protection agency—it is a matter of Profit and Prudence.”
2) Professor Jeff Sachs, Columbia University—“There was a level of recklessness by regulators. How can you allow credit default swaps to grow to $62 trillion in value in 2007 without regulatory review?”
3) Professor Niall Ferguson, Harvard University—“Let’s not go back to financial services of the 1970s when we had exchange controls, interest rate equalization and national markets. This was a problem of insufficient capital reserves, excessive leverage and excess consolidation of financial institutions.”
4) Elizabeth Warren, Chair, TARP Congressional Oversight Panel—“We need a consumer protection agency. How can we allow banks to cash customer checks at the end of a day to maximize overdraft fees? When you go through to the last two lines of the small print on your VISA card statement, you notice a provision that allows the issuing bank to charge whatever rate of interest it deems necessary. Is this right?”
5) Deven Sharma, President, Standard & Poor’s (disclosure: Edelman client)—“We need a new level of transparency in the markets. S&P is now explaining its models, how it came to its ratings on a given security. The assumptions we use are now in the public domain.”
It is a moment of great peril for the financial sector. There is a “disconnect between Main Street and Wall Street,” said Summers, particularly around incentive compensation, both in its size and terms. A return to the status quo, where banks put capital to work in high risk trading ventures and not into loans for small and medium enterprises, is not acceptable to stakeholders except for the shareholders. Perhaps it is time to take a page from the playbook of the technology sector, the highest ranked in terms of trust. Tech is a success because it provides products that improve our lives, is an enlightened employer and has leaders willing to stand up as advocates on important global issues from literacy to competitiveness.
Matthew Bishop, US business editor of the Economist and author of a forthcoming book, The Road from Ruin, says it eloquently, “Though it is often possible for firms to increase their profits in the short run by doing things that hurt society, long term profit maximization for business as a whole requires that companies operate sustainably and give back to society…for too long capitalism’s supporters have been content to agree with its opponents that it is a system built solely on greed. ..The road straight ahead involves preserving the much that is good in capitalism while finding ways to make it work better.” Following Bishop’s advice, bankers should construct a virtuous circle of innovation, explanation of product, regulation to assure good behavior, fair pay to attract talent and strong returns to shareholders.
Posted by Edelman at October 19, 2009 4:53 PM |
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Comments
Russell L. Ackoff, one of America’s premier system thinkers, advocates idealized redesign to dissolve tomorrow's crisis...today. Idealized redesign assumes that the system at issue was destroyed overnight and policy makers attempt to design a new system not be solving its current problems but to DISOLVING the system’s problems. Dissolution is attempted by considering all meritorious features worth considering, on the bases that all options are available for consideration.
Few can argue that we haven’t had a “catch-as-catch-can” style of financial innovation, since the repeal of Glass-Steagall, i.e. regulators being behind the curve on innovation. This is not tolerated in the Pharmaceutical Industry, thanks to the Food and Drug Administration.
If Pharma’s innovation can thrive, with pre-approval, why can’t Wall Street’s?
Posted by: Hugh Campbell at October 19, 2009 10:06 PM
Richard:
I so appreciated that you reported on this. The fact that Goldman could announce in this economic climate the massive bonuses that are in the works, is not only outrageous, but a bad PR move. The fact that they have launched a PR campaign that includes an "explanation" of their rationale to possibly offset the expected outrage, is in itself a strategic misstep. I just wrote in my blog today www.pollackblog.com, a suggestion for a different stance that would make for a far better story and one that could possibly turn exiting negative perceptions of the company round.
Noemi Pollack
Posted by: Noemi Pollack at October 21, 2009 3:57 PM
Great blog posting. I particularly liked the Summers' quote about "the disconnect between Wall Street and Main Street." That has never been more true, although that gap exists even in good times.
I look forward to more informative postings like this!!
Respectfully yours,
Jeffrey Krames
jeffreykrames.com
Posted by: Jeffrey Krames at October 26, 2009 9:56 PM