http://opinionator.blogs.nytimes.com/2010/10/07/make-wall-street-risk-it-all
October 8, 2010
New York Times
Make Wall Street Risk It All
By WILLIAM D. COHAN
<snip>
SINCE neither Goldman's example nor Dodd-Frank and Basel III will
change Wall Street's behavior, we have to find a new mechanism. To my
mind, its central feature should be that each of the top 100 executives
at Wall Street's remaining "systemically important" firms be personally
liable for the risks they take. Not just their unexercised stock
options or restricted stock, but every asset they have in their
possession: from their cars to their fancy homes to their bulging bank
accounts.
The days of privatizing the profits for Wall Street and socializing the
risks must end. As radical as this sounds, in truth it would be no
different from when -- before 1970 -- Wall Street was a series of
private partnerships.
We can't turn back the clock: Wall Street's big firms will never again
be private partnerships. Instead, I propose that each large Wall Street
firm create a new security that represents -- and is secured by -- the
entire net worth of its 100 top executives. This security would be
subordinated to all other creditors as well as to all preferred and
common shareholders; in other words, if a firm goes bankrupt, this
security is the first to be wiped out.
Had such a security existed at the time of the collapse of Lehman
Brothers, the net worth of the top 100 Lehman executives -- no doubt
totaling several billion dollars -- would have been collected after
liquidating everything they owned and paid to Lehman creditors, who
under the current system will be lucky if they get back 10 cents on the
dollar.
Wall Street's first reaction to this idea -- aside from profanities --
will be that it cannot possibly be done. Or that it would somehow
threaten the sanctity of our capital markets.
But, in fact, it can and should be done. Indeed, Wall Street has all
the intellectual capital it needs in its own archives to construct such
a security: in the old partnership days every partner signed an
agreement requiring him (and rarely her) to put his net worth on the
line every day. Surely, clever Wall Street lawyers can draft a
21st-century version of the old partnership agreement.
What's more, Wall Street should take the initiative to do this
unprompted. As John Whitehead warned, the banks' failure to show
responsibility will only invite more government intervention.
If, however, the firms balk, the S.E.C. should require this sort of
accountability from the senior managements as part of its new
regulations governing Wall Street compensation. Or Congress should take
advantage of the still-brewing outrage against Wall Street to force the
creation of such a security.
Pretty harsh, right? Maybe, but Wall Street deserves no sympathy. Had
this security, or something like it, been in place at every Wall Street
firm five years ago, there would have been no mortgage bubble, no
financial crisis, no deep and unsettling economic recession with nearly
10 percent unemployment, no need for the Troubled Asset Relief Program,
and no need for Dodd-Frank or Basel III.
Why? Because human beings do what they are rewarded to do -- especially
on Wall Street -- and if they are rewarded for taking prudent and
sensible risks, that's exactly what they will do.
<end column>
Michael