It's not often you get two guys from opposite ends of the political spectrum to agree on anything these days. But that very thing occurred this weekend when Obama's chief economic adviser Larry Summers and Clusterstock's Henry Blodget agreed that the best way to reform Wall Street is to allow it to blow itself up.
In a speech at Georgetown on Friday, Summers made the comment, "Our financial system will not be fail-safe until it is safe for failure." and went on to decry the concept of institutions "too big to fail".
Meanwhile, Blodget published an excellent piece on Clusterstock where he advocated for the non-intervention of the Fed into executive compensation and opined that Wall Street could effectively self-regulate if the banks knew there was no safety net.
Among Blodget's suggestions were these special rules of financial bankruptcy:
- * managements should be tossed
- * compensation contracts and other liabilities should be torn up
- * bonus pools should be zeroed until the firms return to annual profitability
- * equity and preferred shareholders should be wiped out
- * junior bondholders should get a major haircut through the immediate, forced conversion of debt to equity
Sound a little harsh? The reality is that the problem has only grown worse in the past year. We now have even bigger banks than we did a year ago. The government is talking about divesting their ownership in. Imagine what would happen if Citi shit the bed again. Would the government step back in to save them?
There has to be consequences for mismanagement.
Unfortunately, it may already be too late. The Fed is preparing to insert itself into compensation policy in a big way, and that idiot Chris Dodd (did I say that out loud?) is proposing legislation to create a leviathan government financial agency by combining the Federal Reserve, the FDIC, Office of Thrift Supervision, and the Office of the Comptroller of the Currency. My guess is that he doesn't want anyone else to get the kind of sweetheart deal he got from Countrywide on a mortgage.
As an industry, we have to police ourselves, or they'll do it for us. And, like pretty much everything else they manage, our business will turn to shit.