one side or the bare it all seizes
logger bailout nation how greedy and easy money cross the wall street’s and
shook the world economy berry lovingly a turks battening we
appreciate your time all right i want to start with uh… point number three
years ana list i have which is uh… shows of the biggest fifteen investment
banks mortgage firms a commercial banks retired from the firm’s they help to
ruin and took home over one point five billion dollars in
compensation that’s and unbelievable you know what how did they do it let’s
talk about the well it goes back and quite a good couple years and roger
lowenstein booker origins of the crash written after the two thousand crash not
the two thousand eight crashed pretty much talked about a real change in corporate governance
become a corporate governance you know in theory a corporation is a democracy in their
shareholders are like voters and they vote for a board of
directors and that board of directors it’s a post operate on behalf of the
shareholders but what ends up happening is the way
the rules are structured if not a true democracy the deck is very
much and in some company that it’s not just
finance companies but it’s a lot of other farms this c_e_o_ manages to put a lot of his golf buddies and other
cronies in the book i call it crony capitalism on the board they basically vote absurd packages for
him why and it’s typically have ninety eight
percent of time at the agm then they go out in order to justify this they hired
a study group of weasels cole compensation consultant in these
people were you know absolutely corrupt blind weasels we’ll just take a big check this a yet
this is stand in the industry if you don’t take
this guy your competition is going to grab and
you’ve got to give them all this money and the numbers are
upstart so when you feel robert nigh deluge road homedepot into a negative state versus
blows he left with four hundred million dollars prompt even even some of the guys ads
ads women brothers and expense cold cashed out a billion dollars
although uh… a good chunk of that he gave back i think he’s going to have to
scrape by with the mir four hundred and fifty million dollars
and and you know how could you really live on maps of the budget is a quick five
there before we won the structural problem wire how do you go back well you get it back ok sitting in a lot
of exercise doc led to the routes so i hope that we don’t have a good for
the shareholders hey i did a lousy job here some of your
money back alpa you know and i make a little better this was ill with a guy
like dick fold he had been beaten with a live free with
with the company for decades and even though he was in a particularly
good c_e_o_ and it was very took a lot of risk in they listen to the staff and allowed the firm to become whale
over leverage that and way too exposed two mortgages at the eat you know
they’ve been taking bled lean and green well i think he even leave he was doing
what was best for the company despite the fact that he helps drive it
right over the client and so he had exercised a lot of option
they’ve got a billion if some insane amount of option dollars and the stuff that he actually had sold or had already sold the got cash out on but he still had a decent amount until
they got the best times had a billion dollars in in stock that they had gets
old deborah rules when you’re an insider and you can turn around and just dump you know a billion dollars worth of
stock so i would imagine eventually over time they would have castell all of this ban but as of you know the collapse of the
air in in march await and the collapse of women in september
ono only um you know that they were on the route two to selling stock so when i was still in stock form
lost most of its value whatever they had already cashed and
while that metal you know uh… it’s not easy supporting
of the left in tuscany and an outstanding in north
palm beach in another and and and there are caught that you have to do is expensive steiner
says so and by all precedence that fall they’ll
walk away with it at least four hundred million dollars right whatever you will you know spending and living on and and
uh… not not a bad gig for driving the eighty
six-year-old business the name into obscurity on bankrupt the
company if i get paid four million dollars to do it sought even if you
don’t bankrupt the company film out of bed not a big kick okie dalbello we’ve got to talk about
bill how loose a lot to happening slimy shareholders obviously i can’t be happy about the
situation however the board set up so that the shareholders do not have as
much say as a people running the company will completely different set it hidden
in plain view it actually i’d stop and think about mom and pop
with their average portfolio if your client of merrill lynch and
morgan stanley’s typically have a a fifteen or twenty stock portfolio and what that means is a huge portal its
stock has eight ten twelve directors uh… you do the math on that ten times
twenty companies is two hundred people pluck the two hundred people they’re
running against you know what individual has trying to
track four hundred directors of the various companies so so it’s out there if that’s close but
nobody but a handful wong am releasing uses and the people who should be paying attention to uh… who have the the time the expertise the money the incentive are all good they actually have the ability david but you know they would much rather not get on the bedside of the investment is because the
investment houses pay them will give them four oh one k_
business give them i_p_o_s so they kind of so
what this year as well as this breakdown and it’s an excellent who selects the board what staying active ivy shareholders there’s a nomination process that typically happen sometimes it’s the board sometimes that
the committee very often the board is nominating
themselves and there’s a process to run against
them but it’s much more complex when you’re
an outsider there have been some proposals to democratize this and make it a little
less one-sided alum you know they’re they’re proxy battle
the most of the things like that the bottom line is it’s an enormous
incumbents advantage even more so than running for congress and why do they have an incentive to
make sure that c_e_o_’s and executives get such grotesque compensation at the
cost of the shareholders lot what’s their senate crawler just woken up about
it that sample say somebody utilized by the actually that on
corporate boards some of them are a lot of work some of them are not very very much work and you get paid depending on the size
of the company get a combination of cash and somebody’s got as a professional
directors there on five or six boards each board pay two hundred a hundred and
fifty thousand dollars with a sluggish stock at the company
makes money haiti at the home run and if the company
goes belly-up that really your fault there was a bad technology just the time was wrong everybody leaf as a
million uh… reasons why thumping went down but you know you have to look at the
management them and uh… how the company with handles alright sill now when we get to the the bailout mass
right is we’ve on the show many times in the
conversation we just had of the executives have all dissent over the
world to take as much risk as possible and the shareholders can even get a good
rain on them because the board is in league with the executives
rather being purely with the shareholders so this is a system that is
set up so what about is inevitable winner
vineyard for a long time it operated you know i want to tell if a perfectly cooked a
clearly one of them but it’s operated fairly credibly without a whole lot of of silliness taking place i think two things that happened over
the past couple of decades that are fairly significant that that uh… changes of the ground rules a
little bit and by the way just let me just aren’t as anna side you’ll notice that all of the big
partnerships the lazard freres is and the brown brother have ended and the farmers that are both pretty
substantial info they didn’t blow up they didn’t implode and that’s because of the corporate
structure if your corporation you blow up well hates you know it’s the
shareholders wat so well if you’re a partnership and you blow up to take a print that phil gramm a
vacation a corporation is essentially a shield
and you can’t go after insiders the whole idea of a shareholder
corporation is that’s where the u have put up to buy those shares that’s
the most you’re risking in a partnership if you did what let
they’d citigroup or merrill lynch or so many other farmers didn’t lose tens
of billions of dollars well the creditors don’t just go after
the partnership the way they would go after the corporation they would also go
after the assets of each individual partner it’s a joint and several liability which
means their house their car there relax the boat you know their bank account for
retirement account everything is at risk so we are look at that structured not a surprise that these shareholders um… got a short in the stick in the
partnerships exercise much better judgment when it
came to taking rest i knew i was going to suck today and so i thought i had a
son coincident when you actually meetings for a little more says you are
the absolute right so did all the partnerships like lazard go onstage and hundred-percent not almost not
ninety nine ut ninety eight all of the big wall street partnerships and by the way forty years ago goldman
sachs and mel and chk and monique that they were partnership
to fill in the past couple of decades that they went public but you know uh… i i want to make sure i’m making
it clear the difference if you’re a corporate insiders if you’re
at you know big investment house inc the most you can lose whatever stock ul you not liable for any additional office that or close to the corporate entity and when those who are physically diac
that when the corporate they become insolvent you declare bankruptcy and you walk away
and it’s all over at that opposite is true in in a
partnership in a partnership if your will do whatever with arthur
anderson if your partner disturbing relief uh… an emmy damages the the walk to the etc heed the value of the partnership if he
would ever ask that you have the creditor escape coming at the legal
they’ve exhausted or or be assets of the partnership
itself and then each individual partner and that is not surprisingly creates an incentive to take a little
less risk to be a little more intelligent about
prospect who you’re going to get there’s no incentive to let it all hang out sought some preparation it that they went out
you lose early the way this most reasoned generation of wall street lecturer microbes you know most of its permitted buying
for decades it’s just in the past ten years they’ve
decided to blow themselves up we’re gonna merrit also seniors author
of bailout nation and we’ll put that up on the other
church dot com so you get that in our library leads to a natural consequence that that
must mean that aa corporations since they have this perverse invest
incentive structure need to be more tightly regulated because if you allow
them to take crazy risks they almost certainly will what’s what’s sort of ardent and this is
really and uh… you know i’d i’d love to do it series of psychological interviews every year from nineteen eighty two two
thousand and ten and if you can actually finding
inflection point most part amber you know i’ve been so critical of
wall street and so critical of of washington and on what so bizarre to me is the vast majority of people who work a
wall street had nothing or very little to do it if
they had the best example of that ideology had sixty five thousand
employees three hundred ninety worked in any idea
financial products which was the derivative trading division that blew up the whole farm and so at that number is really extreme
under four hundred vs fifty five thousand but when you look
at these big farms the merrill lynch is in the best time to
leave the brothers it’s it’s water two percent of the whole
thing that was responsible for the the question is this is a long way to go
to answer you question but how can you modifying the incentive so that uh… the guide at the very
periphery the guys who are taking the most amount of risk will be the most
amount of money engaging the most effective behavior how could you modify their behavior so
they don’t think that and some of the shortages are or if you’re engaging in any form of of
speculation that has long term possible trading
consequences if you’re if yours secured by the end
thirty-year mortgages well you should get paid each quarter there should be a substantial chunk of
those are of that payment held back so we know that what you’re
saying selling it into the blow up down the road so because we talked a lot of holdings
and serves on the show who say all answers you get the government out of
the a bit the the way the business and to let the
wall street guys regulate themselves because they don’t like a real doubt
that’s a great idea do you know you want to go if you want to know her regulated
doubt is what you do pickup five-year-old kid and perfect drawing a plate of chocolate
chip cookies i’m now in front of them and faith they could only have half a
cookie i’ll be back in two hours kennedy dot barney apopka if you want to
be upset when you come back what you think he did
he look at that okay one of the various things let let’s also take a step further not only industries not capable of
self-regulation but when you look at the nexus between
washington d_c_ and wall street you know we have an
amendment that separates church and state we really should have an amendment
that separates finance and every one of these companies that blew
up on wall street gig so because they key contributor what they wanted to be seein asked for a
favor got it and then fell on that sword so citigroup had been lobbying to repeal
glass steagle for you know twelve years i mean i added the quote
the book that’s from the the late eighty they’ve been pushing the repeal that they finally got to repeal the
ninety-eight emanate probably one out and took this freedom to do stuff that wall street doesn’t blew
themselves up with it if you look at the commodity futures modernization act which created this special exemption for
derivatives an are like every other financial
instrument that should be on an exchange of the parties
counterpart it’s up to be disclosed and if there’s an obligation to pay if
some in the future you have to have a reserve capital
against potential obligation or be standard
things that make sure that you know if you buy a stock you actually get that stock if you by an
insurance policy when someone dies insurance companies the ability to write
a check and make good on it we carved out this exemption for
derivatives all of it was done by a guy named phil
gramm center out of texas on behalf of and his wife wendy gramm who was on the
board of directors of and ron it turned out that there was another group lobbying
for this a small optical data i t now end-run blew up doodle accounting fraud derivatives didn’t help bring them down but there’s no doubt that indict g_e_
which had written three trillions that’s with the key three trillion dollars worth of options and i’ve taken a mere ten basis points
against it i listened three billion dollar per year
is not chicken feed that’s one-tenth of one percent of three trillion but stop and think
about halal irresponsibly reckless that is you have to make sure that east side of three trillion dollars in into rivers are match perfectly because if they’re not match perfectly
in one something if i could eat a bookie you know if you’ve been on the jets or
or the cult it doesn’t matter as long as there are enough people betting on the other way so that level and the bookie doesn’t doesn’t
want to lose these guys didn’t really do that so when
the housing start the fall and there were problems with with
payments preta porte swaps which would guarantees
on companies lightly in the distance basically bit on the jet and when the cult’s ones they were at just a horrific lee irresponsible wearing run a business and we’re all the studies nobody was
looking at them stands bailiffs commodities future monetization
acting hey you guys really have a lot of
leverage a lot of risk you need to reserve the date that if you
can’t reserved for this well then we’re going to have to work at
them that that didn’t take place and again
that was something they had requested and you know the big five you give me an
example of you won’t let the devil the five biggest investment houses
morgan family goldman sachs merrill lynch lehman
brothers and bear stearns in two thousand four went to the f_e_c_
instead you got to have this rule cold the next
couple of days should rules and it only allows us to take our
capital traded at twelve times the amount of
money we have so if we have our billion dollars we
could only go up by twelve billion dollars with of assets with that that that
twelve to one is really constraining could sometimes we go a little over we
want we need a little fudge room in case we we spend more than we have said that they they bother the irony is
they called it the best and invention goes with anyone who has been a standard
size five billion in assets are greater was exempted was really an exemption for
just these five companies and they probably pretty did not to go twelve and a half a thirteen to
one but twenty five thirty five forty to one now at twelve to one you gotta luv room for error but not all a lot you know something
drops three or four percent of twelve to one you still have some capital left at forty two want something drops two
and a half percent you’re completely wiped out and so the great ideas all five of those
fire that requested this exemption either no longer exists like barrel even uh… or metal or no longer exist um as an investment house golden emotive
philly how to turn themselves into banks in order to be able to go to the fed and
borrow money very cheaply priced out but all of these companies get special
favors if not so much that is their is regulation or
was a regulation there are a lot of examples of them
answering for a favor getting it and using that favor blow themselves up barry tiger’s autograph hours are
bringing on another day abu dot the book is called bailout nation very
eg good in size and then for what went wrong really appreciate you joining us
my predicate the only approach that they you know the holistic view and try to
look at it everything from a corporate a
legislative both central bank perspective and figure
out how the hell with the that’s out there alright basic