There otta be a law

    Gillian Tett in today’s FT

    Why have so few bankers gone to jail in the wake of the financial crisis…Why….  Bernard Madoff (is) now sitting in jail, while all those faceless people who conjured up subprime loans or dodgy .collateralized debt obligations are not?

    ……To be sure the financial industry is dangerously powerful; and some bankers have behaved in ways that were immoral. But whether (they) have actually broken the law is less clear cut.

    If you look closely at those clever financial products that were conjured up……..a defining feature was that they were intended to exploit loopholes in the legal system. “Innovation” was thus about dancing on the edge of laws, regulations and ratings- but not breaking any rules.

    …………….(This) is bad for long-term social..stability. One benefit of ..trials is that they create a sense of….justice. Without any …retribution, there is a risk the anger will fester. That is what is happening now.

                                    Alan Greenspan (recently commented) that he did not “know any senior bankers who have declared personal bankruptcy

    And there’s the rub: as long as bankers not only avoid prison but remain better paid than everyone else….Americans will feel the situation is…….”wrong”.

    ……………………………………………………………………………………………..

    End of excerpt.

     

    And of Ms. Tett’s analysis. Pity because she could have touched another base. Clearly one reason Greenspan and the whole regulatory apparatus were asleep at the switch was that we hadn’t had a good old fashioned financial crisis since WWII.

    And perhaps one reason for that was that until the late 70s the marginal tax rate was 90% which meant that no banker could count on just one year’s bonus to be his ticket to early retirement. Or rather not so much untrue as purely theoretical. No board would approve a bonus high enough so that 10% was enough for a life time in the Grand Cayman. If the idea crossed their minds they rejected it because the share holders would have rejected them for awarding compensation 90% of which would be mailed to the IRS. So in those stodgy pre Reagan days boards didn’t approve mega bonuses, bankers didn’t get them ,AOBTW bankers didn’t cut deal that might risk their bank’s existence. Because they were going to need it next year.

    When the marginal rate dropped into the 30% it was a whole new ball game. Not only did that  leave the bonus baby with  two thirds of his hard earned  reward (instead of 10%, let's say 7 times as much),it also made it rational  for boards to approve a larger gross bonus. So the pot got bigger and the cook's share was 7 times higher  of that larger amount. And his concern for the future of the bank went down.

    Yeah I know. Loyalty. If you're looking for loyalty as my old grandmother used to say, try the dictionary. Under L.

    Which leads to a suggestion for an alternative to crafting a new set of regulations which a new set of bankers will try and succeed  to Innovate around-until the next crash. Instead, a simple minded way to reduce risky banking would be to bring back the good old fashioned 90% marginal tax bracket.

    Be good for the deficit too. Probably actually  better than cutting Head Start.

     

    Comments

    Your rationale makes perfect sense, Flavius.

    And people are beginning to get the point.  Here's a joke a Tea Party buddy of mine in Texas wrote me:

    "George Bush, Queen Elizabeth, and Vladimir Putin all die and go to hell.  While there, they spy a red phone and ask what the phone is for.  The devil tells them it is for calling back to Earth.  Putin asks to call Russia and talks for 5 minutes.  When he was finished the devil informs him that the cost is a million dollars, so Putin writes him a check.
     
    "Next Queen Elizabeth calls England and talks for 30 minutes.  When she was finished the devil informs her that the cost is 6 million dollars, so Queen Elizabeth writes him a check.
    Finally George Bush gets his turn and talks for 4 hours.  When he was finished the devil informed him that there would be no charge for the call and feel free to call the USA anytime.
    When Putin hears this he goes ballistic and asks the devil why Bush got to call the USA free.  The devil replied, Since Obama became president of the USA, the country has gone to hell, so it's a local call." 


    My "cook's share was seven times higher"  statement maybe should be illustrated

    In 1975 if Bill Banker got a million dollar bonus he was left with something under  $100K after tax.. In 1985 he'd keep around  $650K . Hello Long Term Capital Management !

    The risk manager in my family -really- disagrees with my theory that these higher bonuses resulted in riskier decisions. But here at Flav News we report you decide. 


    Read 13 Bankers, by Simon Johnson and James Kwak, and you'll see the whole picture.

    The Bailed Out Banks (BOBs) own the Fed, Treasury and Congress, lock stock and barrel.  They hold the keys so none of them have a fear of going to jail.

    Congress should have let them all fail then taken them into receivership, reorganized them and sold them back to the public once they were sanitized. But to have done so would have short changed the stockholders...they would have lost their asses completely. Of course, those same shareholders I suspect were big GOPer campaign donation power players...wipe them out and no large campaign funds for re-election.

    Also, the BOBs have refused for years for the government interfere and regulate their operations...they didn't want anything like the FDIC to cover their asses if the unthinkable ever happened because they were too smart to act so gullible...famous last words.

    As far as I'm concerned, if the BOBs ever come back and ask the public to bail them out again...which may very well happen..., they should be told can find all the sympathy they need in the dictionary between shit and syphilis.


    I usually make some sort of temporizing reply so as not to ever have a definite position.I can't think of one in this case. But give me time.


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