Rewarded for Failure

Although I disagree with economists about many things, I'm a big believer when it comes to incentive theories. Simply put, when people are rewarded in some way for doing one thing instead of another, they will tend to oblige.

That is one reason why, for example, Soviet factories were famous for producing large stockpiles of substandard goods that nobody really wanted. Instead of responding to market forces, workers and managers were being rewarded on the basis of how well they met state-mandated production targets.

In that vein, given that many of those who helped bring about the worst financial crisis since the Great Depression are still in charge -- read: being rewarded for earlier bad behavior -- as detailed in the following Associated Press report, "AP IMPACT: No Pink Slips for Bailed-Out Bank Execs," logic suggests they will carry on making the same mistakes as before.

They've been bailed out, but not kicked out.

At banks that are receiving federal bailout money nearly nine out of every 10 of the most senior executives from 2006 are still on the job, according to an Associated Press analysis of regulatory and company documents.

The AP's review reveals one of the ironies of the bank bailout: The same executives who were at the controls as the banking system nearly collapsed are the ones the government is counting on to help save it.

Even top executives whose banks made such risky loans they imperiled the economy have been largely spared any threat to their jobs, as Washington pumped billions in taxpayer money into the companies. Less fortunate are more than 100,000 bank employees laid off during a two-year stretch when industry unemployment nearly tripled, bank stocks plummeted and credit dried up.

"The same people at the top are still there, the same people who made the decisions causing a lot of our financial crisis," said Rebecca Trevino of Louisville, Ky., a mother of three who was laid off from her job as a Bank of America training coordinator in October. "But that's what tends to happen in leadership. The people at the top, there's always some other place to lay blame."

That workers and managers experience a recession differently is hardly a surprise. What's new is that taxpayers are now shareholders in the nation's bailed-out banks, yet they lack the usual shareholder power to question management decisions or demand house-cleaning in the executive suites.

Wells Fargo & Co., for example, once was among the top lenders of subprime mortgages, or loans to buyers with low credit scores. The company received $25 billion in bailout money and plans layoffs in the coming months. But longtime CEO Richard Kovacevich remains the company's chairman, and the board recently waived its mandatory retirement age for him. John Stumpf, the president since 2005, became chief executive in 2007.

"Our senior leadership team of our CEO and his direct reports have an average tenure of almost a quarter-century with our company," Wells Fargo spokeswoman Julia Tunis Bernard said in a prepared statement. "Our unchanging vision, values and time-tested business model will continue to guide our leaders and our team into the future, and are now more than ever a competitive advantage as our industry evolves."

Under the government's no-strings-attached bailout plan, taxpayers must take it on faith that bank executives will make better decisions this time around, said Jamie Court, president of the California-based group Consumer Watchdog.

"When you deal with the same dogs, you're going to end up with the same fleas," Court said.

The bailout list includes banks of all sizes — from Wall Street giants to small community banks. Some led the rush into subprime mortgages. Others followed.

Many executives on the list are small-town executives who don't earn anything close to Wall Street salaries and who suffered alongside their communities when the economy turned sour. The trouble with the bailout is that nobody in government ever stopped to figure out who caused the avalanche and who simply got buried, said University of Maryland business professor Peter Morici.

"If they got involved in questionable loans and contributed to the speculative bubble, they should be out," Morici said. "These people should be removed and banned from banking, unless we wanted to make them all janitors. But the question then is, 'Can they be trusted wandering around the offices at night?'"

Barack Obama as president-elect and some in Congress have suggested auto company executives should lose their jobs as part of the bailout of that industry. But there has been no such suggestion about banks. Congress twice authorized $350 billion in bank bailout money. Both times, lawmakers set few conditions on the money.

The president of the American Bankers Association, Ed Yingling, said he understands taxpayers are frustrated. But most banks had nothing to do with the subprime crisis, he said. As for whether taxpayers should demand management changes, he said that was never a condition of the bailout plan the government crafted.

"Are we going to have the American people saying, 'We're invested in you, so now we should look at your margins, look at every loan you make, look at your lending policies?' No. That was never discussed," Yingling said. "You can't micromanage banks."

In some cases the market held executives accountable for the mortgage crisis. When banks such as Washington Mutual, Merrill Lynch and Lehman Brothers were bought up, many executives lost their jobs. When the government took over mortgage giants Fannie Mae and Freddie Mac, directors and executives were fired.

But the financial bailout has resulted in no such consequences. AP's review of the more than 200 publicly traded banks that received federal bailout money found that about 87 percent of the top three executives in 2006 — typically the chief executive, operating and financial officers — still remain on the job.

And that number is deceptively low, since those few executives who left their jobs often did so because they retired — or died. Several stayed on as directors or in consulting positions.

Even banks that were involved in risky lending saw little turnover:

_JPMorgan Chase & Co., which invested billions in subprime mortgages, has the same leadership team, led by CEO James Dimon. Dimon made about $28 million in 2007. The company is shedding about 10 percent of its investment bank staff.

_Cleveland-based KeyCorp, which ran subprime lending subsidiary Champion Mortgage until late 2006, received $2.5 billion in bailout money. Its chairman and CEO, Henry Meyer, has been in charge since 2001. Jeffrey Weeden, the company's chief financial officer, and Thomas Stevens, the administrative officer who oversaw the risk review group, have been on the job for years.

KeyCorp has been cutting jobs over the past two years, including 200 announced this month at a Tacoma, Wash., call center. A company spokesman said the bank was too busy preparing its earnings report to answer questions about whether taxpayers should have confidence in the company's management.

"The on-the-record comment I would make is that we declined to comment even though we'd like to, because we don't have time," spokesman Bill Murschel said.

_Capital One Financial Corp., one of the nation's biggest credit-card providers, dove into the risky mortgage business when it bought GreenPoint Mortgage in 2006. GreenPoint made exotic loans to borrowers without verifying income or credit scores, then sold those loans to investors.

A year later, Capital One shuttered GreenPoint, cutting 1,900 jobs. CEO Richard Fairbank and his top executives were not among them. The company received about $3.5 billion in bailout money.

In Louisville, Trevino and her family are living mostly off credit cards and savings while she interviews for jobs. Her husband is in commercial real estate, which has slowed significantly. After what she described as a bare-bones Christmas, she said she looked over her household finances and realized they might lose their home.

"That's when I was just, 'Lord, I know you have a plan. Can you just show me? I'd really like to know,'" she said.

Trevino said she isn't upset that her old boss, Bank of America CEO Ken Lewis, is still on the job. There are others in the industry with greater responsibility for the crisis, she said.

Trevino agreed the federal government needed to rescue the banks but said there should have been some oversight.

"It is surprising that leadership can make decisions that lead to financial ruin for so many," she said, "and then get bailed out for it."

Comments

[Independent Accountant]

Incentives count: http://skepticaltexascpa.blogspot.com/2009/01/incentives-count-for-bankers-too-3.html.
Our entire financial system is screwed up.

[farang]

"The president of the American Bankers Association, Ed Yingling, said he understands taxpayers are frustrated. But most banks had nothing to do with the subprime crisis, he said.

Good to hear, if most banks (and the management of those banks you represent) had nothing to do with the subprime crisis, then they don't need our tax dollars, right Ed?

"As for whether taxpayers should demand management changes, he said that was never a condition of the bailout plan the government crafted."

Right, and "the government" is who, Ed? Those unresponsive bribed fatcats that IGNORED the WILL of the majority of the PEOPLE, and shoveled you crooks OUR future prosperity over our protests. Because YOU bribed them to do so. Oh, okay "Lobbied" them, that better?

No one asked you what the conditions were, now did they Ed? The point you strive mightly to avoid acknowledging is that if your BANKERS had loaned the money to US, we would have many "conditions" to meet, you bankers wouldn't loan us money without oversight, nor would you bankers invest in corporations, banks, etc., WITHOUT the power to vote on that corporations policies or leadership, now would you Ed?

What was that, Ed?

"Are we going to have the American people saying, 'We're invested in you, so now we should look at your margins, look at every loan you make, look at your lending policies?' No. That was never discussed," Yingling said.

Again, no one asked you what was discussed, now did they Ed? And what are we to believe, that you BANKERS don't look at margins of borrowers? At the solidity of borrowers loan portfolios? At the borrowers lending policies (business plan)? BULLSHIT Ed.

What? You said what?

"You can't micromanage banks."

No, YOU and YOUR CRIMINAL BANKSTERS can't micromanage banks (although it seems you Executives make too many millions doing SOMETHING, if it ain't "micromanagement", then I don't understand English), obviously, because you thieves need TRILLIONS of OUR money, but don't want us to know why you are parking it in overseas tax-free havens. But then again, YOU don't need our money, because "most" of you "had nothing to do" with this crisis. Bwahahahaha. You funny man.

Get nervous, Ed. We see the 3rd battalion has been assigned "Homeland" detail with NorthCom. Yes, what goes around comes around.

There won't be 25,000 hungry vets demanding their PROMISED BACK PAY, to be bayoneted by that fascist braggard Patton. Nor a ho-hum indifference to embezzling "the bailout" like under Hoover, Ed.

There will be millions of unemployed, hungry and homeless people, and we have ARMS. Thanks George, Thomas and Patrick.

There will be blood in the streets, and I WILL be looking for your types, Ed.

I PROMISE.

Not all of us businessmen are con artist, flim-flam LIARS, you fucker.

I wonder: shall we "do" Wall Street or Pennsylvania Ave first? Maybe both at the same time is better.

[Purple]

There's plenty of research to indicate behaviorism doesn't work, over the medium term or long term. Putting an incentive on something diminishes its inherent worth. People notice that at some level. To maintain performance, ever greater incentives are needed to supplant the loss of inherent worth.

[Purple]

Therefore, behaviorism is a philosophy quite a home with consumerism, or the relentless growth needed to fuel capitalism.

[Tom]

Uhhhhhh, how about we fire everyone in Congress and abolish the Federal Reserve while we're at it. Clearly the banks execs thought there was a market for their products (as crappy as they were), and that market was created and fed by Big Gov'ment.

[Marion Shaw]

There is an historical precedent for what we are
witnessing in the banking and industrial meltdown of
the US and global economy. The Hugo Black Hearings of
1932 exposed a shocking cabal of interlocking banking
and corporate interests (ie. General Motors) that
overcapitalized and illegally created the American
aviation industry, (ie. North American Aviation in
1928), Curtiss Wright, which in large part fueled the reckless speculation that led to the 1929 crash. Little known
names like Edward Deeds, H.Talbot, Frederick Rentschler,
(all from Ohio) were at the center of these investiga-
tions, showing in come cases that people like
Rentschler (president of CityBank in New York) made
a cool 15 million in the frenzy and friends like
William Boeing (yes our own Boeing Aircraft Co) made
a cool nine million on a 350.oo investment. A few
went to jail, like Whitney, the head of the New York
Stock Exchanage; a few committed suicide; but most
not only survived, but Deeds, co founder of Pratt and
Whitney, went on to be a trustee of City Bank,
his co-hort, Charles Kettering, went on to become
one of our great inventive heroes, etc. The latter,
by the way, were convicted felons in Ohio in a 1912
case for bribery and criminal business methods. They
escaped jail through a legal technicality. Harvard Prof. Z.Ripley documents the case in his world
class book on Trusts and Pools; another dusty old
book long forgotten by most. The point is, an un-
ethical group got control of the banking and govern-
ment contracting process in the 1930's and helped
reverse the depression with massive arms sales to
the little new Napoleonic creation in Germany called
Hitler. Their grandsons emerged as Lords of the Earth
after world war TWO and they are the ones who might
be held to account for their behind the scenes control
of the American political and economic process. We
still have a constitution in theory and we still live
by the law , in theory. There are mechanisms to demand
house cleaning although prying a privileged class
from a hundred years of secured wealth and position,
is like getting an old poison ivy vine off an oak
tree. However, the above angry accountant, and
rightly angry I might add, must go back and take
note that anarchy, revolution in the streets and
mob rule, never produces justice or correction to
a corrupt system. Let the Hugo Black Hearings begin
again and this time, get Fitzpatrick and his kind
in there to put the thieves in jail and remember
what hereditary wealth did to England in 1776.
That we should remember and find peaceful solutions.
This is a different world and there are many countries,thanks to the United States, sitting around
with nuclear bombs in their storage facilities;and
some on airplanes that fly around with loaded bombs,
unknown to the pilot and crew. There will be no
winners if that evil spirit unleashes its power upon
us.

[roger]

On the subject of rewards:Down through history some
of the very best minds and I mean the very BEST
went to work without any idea of monetary rewards,
learning discovering and helping us understand was
their only objective.Cultures of greed ,thievery &
selfishness just don't happen out of the blue .
Hint one out a zillion others:today even children are
taught to expect monetary gain for helping around the house
very few are 'told'that helping around the house is a family obligation.
Advertising (propaganda)is the greatest teacher/advocate of
of selfishness and greed

[JohnyD]

Wells Fargo spokeswoman Julia Tunis Bernard said in a prepared statement. "Our unchanging vision, values and time-tested business model will continue to guide our leaders and our team into the future" (THAT IMPLIES WE CAN LOOK FORWARD TO MORE STELLAR PERFORMANCE BY THESE TOOLS).

Ed Yingling, said he understands taxpayers are frustrated, but most banks had nothing to do with the subprime crisis. (BUT THEY SURE HAD A GRAND TIME GIFT WRAPPING THEIR OWN BRAND OF GARBAGE, DIDN'T THEY - WHO DO WE BLAME FOR THE SUBPRIME CRISIS, ANYBODY WITH A FICO UNDER 600?) HEY wait a minute - CITI IS A BANK, AND WACHOVIA, AND WF too. AND BESIDES IT ISN'T A SUBPRIME CRISIS, dickhead, IT'S A 'BANKS & BROKERS GONE WILD" CRISIS.

I must have missed when those laws that were violated, when Lay, Skilling, Minkow, Fastow, Milken and Martha Stewart did time, were repealed. Where was the SEC? Where is the outrage?

Sweet move getting Spitzer out of the way. The big boys sat on that wild card until they needed it, right before it was time to flush Cayne and Fuld.