Democratic Underground Latest Greatest Lobby Journals Search Options Help Login
Google

Cenk---The Flaw in the System: The Bankers Don't Care About the Banks (#1 Rated Diary @ DailyKos)

Printer-friendly format Printer-friendly format
Printer-friendly format Email this thread to a friend
Printer-friendly format Bookmark this thread
This topic is archived.
Home » Discuss » Editorials & Other Articles Donate to DU
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 01:11 PM
Original message
Cenk---The Flaw in the System: The Bankers Don't Care About the Banks (#1 Rated Diary @ DailyKos)
The Flaw in the System: The Bankers Don't Care About the Banks
By Cenk Uygur

Alan Greenspan says he is in a "state of shocked disbelief" that the concept of self-interest did not protect the banks from taking excessive risks and destroying themselves. But he, along with Tim Geithner and Larry Summers and many others, are missing the fundamental flaw in the system. The bankers don't care about the banks; they care about the bankers.

The enlightened self-interest of the bank executives has been separated from the interests of the banks they work for. In the 1970's, the banks were still privately owned. So, the guy up at the top wanted to protect his company, his interest and his money. If his executives took unwarranted risks with the boss's money, they were goners. But these days the people at the top of these companies don't own the companies. It's not their money.

Here is how the Wall Street Journal explains it (a useful nugget in an otherwise horrible piece):

"The Wall Street compensation system has evolved from the 1970s, when most of the firms were private partnerships, owned by partners who paid out a designated share of the firm's profits to nonpartner employees while dividing up the rest for themselves. The nonpartners had to earn their keep every year, but the partners' percentage ownerships in the firms were also reset every year or two. On the whole, everyone's performance was continuously evaluated and rewarded or penalized. The system provided great incentives to create profits, but also, because the partners' own money was involved, to avoid great risk."


These days, the way executives make money instead is in the form of bonuses for years where they bring in a lot of return (and often times for years they don't), but the threat of being fired for too much risk taking is minimal. The more risk you take, the more money everyone makes. And it's not the partner's money you're playing with anymore. You're playing with house money. No one is minding the store anymore.

Now think about it this way: if you were going to make ten million dollars in bonuses for taking high risks with other people's money, would you do it? The answer invariably is - hell yes!

If it's your own money on the line, you might be extraordinarily careful with the risk you take. But if you are going to get a multi-million dollar reward for taking risks, but you expose your company to a little bit more risk, what percentage of people would take that extra risk on behalf of their company? I would venture to guess 98%.

And the other 2% are suckers. There is no downside for you. The higher the risk, the higher the return in the short-run (which actually lasted a long time) and the higher your take home salary is. Are you going to be the only guy on Wall Street saying, "Well, golly gee willikers, everyone else is making millions but I really care about my shareholders. I don't want that huge bonus. I want safe investments for my company."? That's not how human nature works.

So, now we have Tim Geithner and the rest of Treasury working so hard to prop up not just these failed banks - but these failed bank executives - because we don't want government running these large companies. The self-interest of the market will do a better job of managing these companies. But it hasn't - because of this fundamental flaw.

These executives did not actually fail. They succeeded wildly. It's just that they had a different goal - to take home as much money as they possibly could for themselves. Mission accomplished!

I don't blame them. The system is set up wrong. Almost anyone in their position would have done the same - and will continue to do the same as long as we are foolish enough to keep pouring money into these companies. They are going to try to move every nickel they can from our pockets into theirs.

The Treasury plan is all wrong. We have to first acknowledge that the boards of these companies are not truly representing the shareholders. They are largely friends with most of the CEOs and they do not have an incentive to reign in out of control compensation for the top executives. Then those CEOs pass on the wrong incentives to the executives below them. The more risk they all take, the more money they take home. And if their company goes broke one day - who cares?

Most of these guys took home millions upon millions of dollars already for profits that never really existed. If the company goes under, okay the gravy train came to an end but they still have all the money they made from all those years. It's in their personal bank accounts. That's enlightened self-interest!

Do you know that last year, as Merrill Lynch was in its death throes, 696 executives got bonuses over a million dollars? 696! As the company lost tens of billions of dollars, the executives took home a combined $3.6 billion that year. Billions in bonuses in the worst year in the company's history. They're not stupid; they're smart. They're looting the store before the cops show up.

This is the financial equivalent of the federal government not showing up to rescue people after Hurricane Katrina. Last year the five biggest Wall Street securities firms lost $25.3 billion. The executives at those companies still took home $26 billion in bonuses. In other words, they wouldn't have lost a nickel if they hadn't taken any bonuses.

Do you think if the guys up at the top still owned the companies they would allow their employees to take home $26 billion in bonuses when they lost $25 billion that year? Self-interest would never allow that. But now no one is looking over their shoulder.

So who cares what the company loses? Take the money while you still can. The Treasury Department still hasn't shown up to take over these looted stores. In fact, they keep pouring taxpayer money into these same shops, as the money continues to move out the back door. Tim Geithner is the worst sheriff in the world.

But we already knew that. Because the main guy who was overseeing all of these banks in New York, as they took these giants risks, was the president of the Federal Reserve Bank of New York - Tim Geithner...

To read the rest along with hundreds of DailyKos comments, Click Here
Printer Friendly | Permalink |  | Top
catzies Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 01:34 PM
Response to Original message
1. The bankers and the financial industry spent $5 billion lobbying for deregulation
And they stole countless billions.

Quite a return on investement.

I agree with you, they did not fail. Quite the opposite. They were wildly, wildly successful.
Printer Friendly | Permalink |  | Top
 
truedelphi Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 04:27 PM
Response to Reply #1
15. Ding Ding DIng. We have a winner.
And while the executives at the banking insitutions win, we as a society lose.
Printer Friendly | Permalink |  | Top
 
yellerpup Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 01:46 PM
Response to Original message
2. K&R!
:dem: :dem: :dem:
Printer Friendly | Permalink |  | Top
 
navarth Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 01:49 PM
Response to Original message
3. K & R
Printer Friendly | Permalink |  | Top
 
Seldona Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:05 PM
Response to Original message
4. K&R
Well said.
Printer Friendly | Permalink |  | Top
 
Kajsa Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:08 PM
Response to Original message
5. We need to restructure the banks,
Edited on Sun Mar-08-09 02:09 PM by Kajsa
starting with top management!

Seriously people, I don't see much
change coming when the same people
are in charge doing the same things over
and over, again.

Expecting different results IS
the definition of insanity.

K and R.
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 06:16 PM
Response to Reply #5
18. If only we had Joseph Stiglitz instead of TG. n/t
Printer Friendly | Permalink |  | Top
 
Kajsa Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 09:00 AM
Response to Reply #18
26. Absolutely!

Now that's who we need at the helm.

:)
Printer Friendly | Permalink |  | Top
 
tbyg52 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:10 PM
Response to Original message
6. Word. nt
Printer Friendly | Permalink |  | Top
 
ejbr Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:17 PM
Response to Original message
7. K & R n/t
Printer Friendly | Permalink |  | Top
 
Divine Discontent Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:17 PM
Response to Original message
8. K&R 8!
This was one of the more important commentaries by Cenk. This fact is so very true and speaks about the "inward" soul as many people like to talk about when discussing what could make someone do something horrible - well, robbing a nation blind while knowing it will eventually cause economic ruin, but you'll have millions is what I call an empty shell of a human.


"A Witness To History" Inaugural items www.cafepress.com/warisprofitable
Printer Friendly | Permalink |  | Top
 
pleah Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:19 PM
Response to Original message
9. K&R
Printer Friendly | Permalink |  | Top
 
midnight Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 02:30 PM
Response to Original message
10. Bankers-"They're looting the store before the cops show up."
Did congress drive the get away car?
Printer Friendly | Permalink |  | Top
 
CherylK Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 03:33 PM
Response to Original message
11. K & R!!!
:applause:
Printer Friendly | Permalink |  | Top
 
matthewf Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 03:42 PM
Response to Original message
12. k&r
Printer Friendly | Permalink |  | Top
 
Uncle Joe Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 03:43 PM
Response to Original message
13. Kicked and recommended.
Thanks for the thread, ihavenobias.
Printer Friendly | Permalink |  | Top
 
earth mom Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 03:49 PM
Response to Original message
14. "Tim Geithner is the worst sheriff in the world"-that says it all!
"the main guy who was overseeing all of these banks in New York, as they took these giants risks, was the president of the Federal Reserve Bank of New York - Tim Geithner..."

:grr:

And some people around DU are fine with Geithner, because Obama picked him. :eyes:
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 06:35 PM
Response to Reply #14
19. I agree with the sentiment you express in your last sentence.
Oh well, they'll figure it out eventually...hopefully it doesn't take disastrous results to make it happen though.
Printer Friendly | Permalink |  | Top
 
earth mom Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 12:25 AM
Response to Reply #19
23. You need to take your blinders off or you will be in for a rude awakening when the economy
Edited on Mon Mar-09-09 12:26 AM by earth mom
completely goes to hell.

Me, I'd rather not live in denial or be so naive.
Printer Friendly | Permalink |  | Top
 
theFrankFactor Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 05:27 PM
Response to Original message
16. K&R Baby!
Printer Friendly | Permalink |  | Top
 
OhioChick Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 05:42 PM
Response to Original message
17. K&R
:kick:
Printer Friendly | Permalink |  | Top
 
CherylK Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 07:56 PM
Response to Original message
20. Bump!
:kick:
Printer Friendly | Permalink |  | Top
 
20score Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 08:31 PM
Response to Original message
21. Very good! K&R
Printer Friendly | Permalink |  | Top
 
ChromeFoundry Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Mar-08-09 10:46 PM
Response to Original message
22. K&R
:kick:
Printer Friendly | Permalink |  | Top
 
yurbud Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 03:49 AM
Response to Original message
24. crucial analysis. Geithner, Rubin, Summers, & Bernanke belong in prison, not calling the shots
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 11:42 AM
Response to Reply #24
28. I'd settle for them not calling the shots.
Like I said before, throw these clowns out and replace them with Joseph Stiglitz and Paul Krugman.
Printer Friendly | Permalink |  | Top
 
yurbud Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 12:44 PM
Response to Reply #28
30. My hope is that he is doing to them what he did to GOP--letting them strangle on their corruption &
incompetence publicly, so that when he kicks them to the curb, they will have even less credibility than if he simply bypassed them in the first place.

If that's what he's doing, it is aggravating and costly, but probably necessary--if he doesn't let the financial elite know they are utterly, utterly bankrupt intellectually, morally, and of course, financially before he tries to cross them, they would kill him. literally.

If he doesn't eventually cross them, we will be dead.
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 03:02 PM
Response to Reply #30
32. That sure seems like a dangerous way of doing it. n/t
Printer Friendly | Permalink |  | Top
 
lonestarnot Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 07:22 AM
Response to Original message
25. K & R
Printer Friendly | Permalink |  | Top
 
OhioChick Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 10:39 AM
Response to Original message
27. Morning Kick
:kick:
Printer Friendly | Permalink |  | Top
 
FiveGoodMen Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 12:09 PM
Response to Original message
29. K&R
Printer Friendly | Permalink |  | Top
 
CJCRANE Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 01:25 PM
Response to Original message
31. The bankers have cashed out
and taken all of our money with them.
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Mar-09-09 05:54 PM
Response to Reply #31
33. We can dream that we'll get some of the money back.
But I won't count on it.
Printer Friendly | Permalink |  | Top
 
Seldona Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Mar-10-09 06:17 PM
Response to Original message
34. Brilliant op.
Edited on Tue Mar-10-09 06:19 PM by Seldona
snip

These days, the way executives make money instead is in the form of bonuses for years where they bring in a lot of return (and often times for years they don't), but the threat of being fired for too much risk taking is minimal. The more risk you take, the more money everyone makes. And it's not the partner's money you're playing with anymore. You're playing with house money. No one is minding the store anymore.

Now think about it this way: if you were going to make ten million dollars in bonuses for taking high risks with other people's money, would you do it? The answer invariably is - hell yes!

If it's your own money on the line, you might be extraordinarily careful with the risk you take. But if you are going to get a multi-million dollar reward for taking risks, but you expose your company to a little bit more risk, what percentage of people would take that extra risk on behalf of their company? I would venture to guess 98%.

And the other 2% are suckers. There is no downside for you. The higher the risk, the higher the return in the short-run (which actually lasted a long time) and the higher your take home salary is. Are you going to be the only guy on Wall Street saying, "Well, golly gee willikers, everyone else is making millions but I really care about my shareholders. I don't want that huge bonus. I want safe investments for my company."? That's not how human nature works.

snip

Bingo! The system is geared to produce what we have. So far, imo, we are just throwing good money after bad. I hope this administration stands strong. The shitstorm to come is going to be epic. I don't bandy about words like traitor often, but in the case of republican agenda it really is applicable imo.
Printer Friendly | Permalink |  | Top
 
Earth Bound Misfit Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Mar-11-09 03:16 PM
Response to Original message
35. Kick n/t
Printer Friendly | Permalink |  | Top
 
Seldona Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Mar-13-09 02:16 PM
Response to Original message
36. One final kick.
For any that missed it and are interested.
Printer Friendly | Permalink |  | Top
 
ihavenobias Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-14-09 12:30 PM
Response to Reply #36
37. Thanks. Sometimes the weekend warriors miss things.
:)
Printer Friendly | Permalink |  | Top
 
mbperrin Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-14-09 12:36 PM
Response to Original message
38. In 1776, Adam Smith opposed corporations of any sort for precisely
this reason. With control and responsibility conveniently separated, management's personal self interest becomes divorced from corporate interests.

His solution was that all companies would be subject to unlimited personal liability by their owner/managers. If the company screwed up, the owner/operator would be on the street, literally.

Makes customer service a bit more important.

Nice to see a return to solid thinking.
Printer Friendly | Permalink |  | Top
 
JohnWxy Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-14-09 02:30 PM
Response to Original message
39. I really think it can be stated much more simply : Whenever there is money involved, whenever there
Edited on Sat Mar-14-09 02:55 PM by JohnWxy
is money to be made, you have to have laws and regulations which implement these laws to make sure no cheating is engaged in. Without such laws you can state unequivocally, cheating will take place.

this is not rocket science. Most people (aside from Alan "Mr. Magoo" Greenspan) learn this by the time they are about 12 years old. That's when most people leave the naivete of childhood behind and begin to realize that we humans are not totally trustworthy. That's why we must have laws in place to keep people in line. Without the laws we simply would not have modern civilization. We would quickly go back to the days of warlords and peasants.

Everybody realizes this except the Republicans (actually, they realize it too, they are just paid to sell the scam and are promised to be in on the spoils).

Greenspan was alerted to Predatory Lendors engaging in questionable loan activity by Clinton Administration officials but he blew them off. Also the Office of the Comptroller of the Currency stopped 50 states Attorney's General from enforcing consumer protection laws against predatory lenders. The OCC even filed a suit to stop Eliot Spitzer, then Attorney General of New York, from pursuing an investigation into the practices of predatory lenders in the state of New York.

The Commodity Futures Modernization Act - legalized Credit Default Swaps AND MADE SURE THEY WERE NOT REGULATED. This is how the Credit Catastrophe happened. The availability of Credit Default Swaps enabled banks to sell higher return (and higher risk) mortgages (CDOs) to institutional investors (because the CDSs were supposed to eliminate the risk to the institutional investors). Thus, the higher return (read: sup-prime mortgages) CDOs became highly marketable to institutional investors and this created the exploding demand for the high rate CDOs. This is what drove predatory lenders to beat the bushes for anybody they could sign up to a sub-prime loan. The lack of any regulatory oversight enabled predatory lenders to make loans to people who could not keep up with the payments on these loans and then "flip" these mortgages to Wall Street banks who were so anxious to sell all of the higher return CDOs (Collaterized Debt Obligations) to their institutional customers and other banks around the world.


We are in the midst of a Deregulation Disaster. IF the sub-prime lenders would not have been allowed to engage in fraudulent lending practices and the Credit Default Swaps had not been traded without regulation this disaster would not have happened.





Printer Friendly | Permalink |  | Top
 
DU AdBot (1000+ posts) Click to send private message to this author Click to view 
this author's profile Click to add 
this author to your buddy list Click to add 
this author to your Ignore list Thu Apr 17th 2014, 10:23 PM
Response to Original message
Advertisements [?]
 Top

Home » Discuss » Editorials & Other Articles Donate to DU

Powered by DCForum+ Version 1.1 Copyright 1997-2002 DCScripts.com
Software has been extensively modified by the DU administrators


Important Notices: By participating on this discussion board, visitors agree to abide by the rules outlined on our Rules page. Messages posted on the Democratic Underground Discussion Forums are the opinions of the individuals who post them, and do not necessarily represent the opinions of Democratic Underground, LLC.

Home  |  Discussion Forums  |  Journals |  Store  |  Donate

About DU  |  Contact Us  |  Privacy Policy

Got a message for Democratic Underground? Click here to send us a message.

© 2001 - 2011 Democratic Underground, LLC