Adventures in Banking: Responsibility & Blame

Morgan Housel makes the delightful if infuriating observation that bank execs take credit — along with fat paychecks and even fatter bonuses — on the way up.

On the way down, its always seems to be someone else’s fault:

Robert Rubin, a former Treasury Secretary, joined Citigroup in 1999 as chairman of the executive committee. He was paid $126 million over the next eight years for his experience and wisdom to guide the bank’s management toward success.

When the bank nearly collapsed in 2008, Rubin pled ignorance. After writing a 2003 memoir largely devoted to explaining how extreme circumstances ruin banks, Rubin explained in 2009 that he “did not recognize the serious possibility of the extreme circumstances that the financial system faces today.”

Nine-figure pay on the way up; a fluke and someone else’s problem on the way down.

Tom Maheras, another former Citigroup executive, was paid $97 million in the three years before Citigroup imploded, ostensibly for his skill. After a division he oversaw hemorrhaged losses from subprime mortgages, Maheras told Congress that his division’s fateful decisions were “based in part on a careful study from outside consultants.” Even as markets unraveled, “I continued to believe, based upon what I understood from the experts in the business, that the bank’s holdings were safe,” he said.

Ninety-seven million in pay on the way up; someone else’s fault on the way down.

Its no surprise that people rationalize their own self-interest. Its only human nature.  However, that does not mean investors and/or taxpayers should have to subsidize the stupidity.

“Clawbacks” need to be a legal term that corporate execs must become more familiar with . . .


It’s Your Fault
Morgan Housel, February 3, 2015

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  1. doug commented on Feb 4

    “Clawbacks” need to be a legal term that corporate execs must become more familiar with . . .

    “jail terms” is what I want them to become familiar with….

    I would not advise anyone to hold their breath on either coming true…..

    • cobaltbluedolphins commented on Feb 4

      I think the guillotine would be appropriate for the more egregious cases.

  2. rd commented on Feb 4

    Until “investors” become focused on something more than quarterly and annual earnings, bankers’ bonuses and pay for many executives will be based on an annual basis with no clawbacks. Making a significant amount of a bonus contingent on a rolling 3 to 5 year average in performance would probably eliminate much of this risk problem. However, it is likely that few of these executives would want to have that contract and the companies want them to juice this year’s earnings instead of making sure their companies will be solvent 5 years hence, so they sign on.

    However, there is a fundamental standard of care question regarding competence here when you have people saying they don’t understand the risk. As an engineer, it would be inconceivable to me to be in a position where I have to tell the world that I just don’t have any idea what the risk is associated with a structure that I am designing.

  3. John G commented on Feb 4

    Felon has a good ring too.

  4. rd commented on Feb 4

    Speaking of responsibility, a US Senator thinks it is fine to let the market decide whether or not food service employees must wash their hands after using the restroom. I assume he will also be fine if a drunk driver can be allowed to put a bumper sticker on his vehicle warning people that he may be driving drunk and then allow the “market” to decide how people protect themselves against him instead of arresting him for DUI. I think these nutcases have reversed the normal view on freedoms where they want to control what you do in your own home (they want to ban same sex marriage, etc.) versus freedom to do actions that can actually harm people around you (unvaccinated, non-hand-washing, pollution, etc.) . They want to quarantine uninfected people who may have been exposed to ebola and yet unvaccinated people with exposure to measles attend school as well as push for more guns to be carried publicly despite the 10s of thousands of gun deaths per year.

    • thegonch commented on Feb 5

      This is the ongoing conflict between the urban view of freedom, when every experience is shared, and the rural view of freedom, when a man’s home is his castle.

  5. willid3 commented on Feb 4

    seems like this isnt just bank executives. seems like that is how many but not all executives do this. we are why great things happened,while its our dastdarly high cost labor that failed us. even if that wasnt what it was. in one airline’s case it was high oil prices, but part of that was keeping gas hog airliners flying because they were paid for

  6. bonderman commented on Feb 4

    Anyone expecting Congress to fault bank management for in the mortgage debacle will remain very disappointed. The bribes (large campaign contributions) to Congress members are simply too great for members to reject. After all, most are lawyers who have spent years defending their clients by whatever means they found effective…including obfuscations. So they become the problem. The electorate would be wiser to focus on changing our legislators rather than focusing on the presently untouchable bankers.

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