Why Wall Street is So Irresponsible
If you took a trip to Vegas and lost most of your gambling money, what do you do with the few remaining dollars? Maybe you hold on to get something to eat. Maybe you head to the blackjack table to try to win it back slowly, one hand at a time. Or maybe - take out casino credit and head to the roulette wheel for one spin to hit it big so you head home gloating to your friends about the big score. Quite long odds, but that last one sounds cool doesn't it?
Now, what if your bank acts this way? Actually, there' s a good chance it does. And you're the "house", extending credit that is unlikely to be repaid.
We question the responsibility, accountability, risk controls, and pay structures that exist in our corporate landscape. Look at the latest example, MF Global, which imploded due to a combination of a lack of risk controls, improperly supervised trading, and internal politics that permitted over-leveraged, inadequately collateralized trades. Unfortunately, this example seems emblematic of a bigger problem.
Our economic system is broken - it has been transformed and adulterated. Our corporate culture has changed to the point where individuals - across many levels - are able to put the entire enterprise at risk. The play is for the big payday at almost any expense. With their eyes on the short term and their own compensation, corporate leaders fail to establish long term perspectives and investment objectives that foster stability and sound, lasting businesses.
Reality Check
It seems obvious: the chief responsibility of corporate leaders should be to enact policies and risk controls that maintain the integrity of their firms. The fundamental financial health of the enterprise should be paramount.
Corporate pay structures generously reward those who do two things: cram large amounts of assets under a firm's umbrella, regardless of suitability; and generate present-day revenues, regardless of risk or future profitability. Traders often "shoo away" their own risk departments, placing the firm in potential peril. Rarely are problem makers held accountable. Almost all are able to move on, see the light of another day - sit on another board, lead another company. The financial wreckage they've caused becomes someone else's mess and financial liability.
Things Were Different
Look at Goldman Sachs in the 1990s. The economic climate was very different. Goldman was a partnership. The firm had partner equity at risk and constituents were accountable at least to each other. The firm made big bets and took risks, but also empowered their risk managers to challenge trades. The partners and the board were there to be answered to. The Goldman culture produced financial activity that generally stayed within the confines of well-calculated tolerances that were tied to the firm's goals and objectives. It is unlikely that the firm's entire capital base - the very firm itself - could have been easily jeopardized.
The economic climate of the 1990s is quite contrary to our present-day climate. It was mostly a bull market, and swinging for the fences often produced big hits. By comparison, today we're running out infield dribblers - and swinging for the fences often brings trouble. Too often, risk controls are pushed aside and regarded as a nuisance that interferes with making fortunes. CEO's, Chairmen, and some mighty powerful trading heads are for some reason left relatively free to take the liberty of making excessively risky bets with "house money."
This is what we see in the latest news from MF Global. Mr. Jon Corzine, who had a long and revered career at Goldman Sachs, seems to have the 1990s mindset - in a much different economic environment, and without the capital, risk controls or accountability he had at Goldman.
Who Do You Work For?
It's a sad old song, replayed time and again. CEOs and are appointed by boards of directors, and vice-versa. It can become a very close-knit clique, a cozy situation for sure. At base, they work for the shareholders but do not appear to operate in kind. More care must be taken to protect shareholder interests. Key senior personnel must maintain true independence in thought, mind, and power. Top executives must resist the temptation to achieve bottom line results irrespective of risk. It is impossible to stand behind executive pay structures or strategic direction when those elements are increasingly out of line with what is prudent. Consequently, we must question the decisions made at the top and the motivation that lies therein. Where there is no accountability, individuals are prone to take outlandish risks and disregard good business practice - because they know they won't be held accountable.
Government looms and threatens to intervene. It's as if Mom and Dad gave you the car keys and you crash the car by driving recklessly. You get the benefit of the doubt but what happens after the second crash? What are the chances you'll get the keys back then? Your parents want to give you responsibility, but if you keep messing up what choice do they have?
Government doesn't want to step in, and they shouldn't have to. But when are corporate leaders going to start acting responsibly?
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