Wikinvest Wire

Whitney needs to read Kennedy and Phillips

Wednesday, February 04, 2009

Uber-bank analyst Meredith Whitney really needs to read some of the works of Paul Kennedy and/or Kevin Phillips to understand why some might view today's comments on Wall Street compensation as being not too different from Erin Burnett's views expressed recently on Meet the Press and skewered by new-favorite website The Daily Bail in this memorable ripost:

Ms. Whitney is apparently under the mistaken impression that history began in 1982 and that smart college kids have some inalienable right to move directly to Wall Street after being handed their diploma and then proceed to buy their first of many Maseratis before they've reached the age of thirty.

While it's true that, as Ms. Whitney says, "no one goes to Wall Street to save the world" it is equally true that no one on Wall Street should be permitted to destroy the world...

If, as she continues, "compensation is the motivating factor for our people" and what we are now dealing with is the result of their highly motivated efforts over the last few years, maybe we shouldn't be paying them so much money.

Maybe they're a little too motivated.

It's amazing how someone so smart could be so absolutely ignorant of the bigger historical perspective - skip directly to about 12:20 for the discussion on compensation.
IMAGE Click to play in a new window

There's more in this summary at Bloomberg:
Wall Street pay is getting scrutiny after New York banks and securities firm paid $18.4 billion in bonuses for 2008 while the six biggest New York-based financial companies lost a combined $42.4 billion and got $90 billion in government bailout funds. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said yesterday that “pay got a little exuberant.”

President Barack Obama will today announce a cap of $500,000 on compensation of top executives at companies that receive significant federal assistance, according to an administration official who requested anonymity.

The failure to pay employees well may drive away “the best and the brightest,” Whitney said.

If you can’t compensate your employees, they’re going to go somewhere else,” she said. “You’re going to get a different variety of folks who are going to come in.”
And ... what's wrong with that?

They'll somehow be less competent at bringing the system crashing down?


donna said...

I will happily run any Wall Street company for 500K, and do a better job of it. Hell, I'll even telecommute from my home and do a better job of it!

Fuck them all.

HHB said...

Wouldn't a better solution be to let the insolvent banks fail rather than having the federal government dictate wages in the private sector?

Tim said...

The small banks are failing - it's the banks that are too big to fail that are the issue here.

HHB said...

Let the big banks fail if they are insolvent. Put them into govt receivership so we keep the system on life support, equity holders get wiped out, debt holders take a haircut, and govt creates a bad bank to deal with the bad assets.

This is being suggested by more and more from the left (Krugman) to free-market types (Zingales, Fama).

Mathlete said...

I totally oppose the government bailout and I always oppose government efforts to control salaries and wages.

However, these banks would be out of business if it wasn't for the government. This is no different from Warren Buffett or Kirk Kerkorian forcing a company to accept terms in return for an investment.

Anonymous said...

I think the problem with executive compensation is that it is such that the people who are setting the rules have only their interests at heart. When the companies were owned by founders or families, they always had desire to expand or at least manage to maintain status quo so that it can grow and prosper for years. With professional managers, usually, the goals are very short term. They can make $10-$100M dollars in few years, why do they care if the company goes down after that. Their legacy may go down, their reputation tarnished, and that may be an incentive in future for not showing this greedy behavior. But, think about it - if you can make so much money that future generations may not have to work at all, would you not do the same thing. I would say a lot of people (if not everyone) would be motivated. I think it is same behavior you see with Silicon Valley companies (even with ordinary employees ) forget about CEOs. Tjos early employees want to make quick buck (few millions) and run for the exits. The paypacket encorages that behavior. You cannot control everyone, and at every level, but, it has to start from the top, and compensation plans should be based on long term objectives, and delivery of those long term goals rather than short term of (1-2 years), and that means they do not get paid unless they show results for 5 years or even 10 years or longer. Then people would be forced to stick around, and think of working at the firm for their entire life rather than cashing out their chips early. Of course, there are various ways you/government/shareholders/board of directors can do this. The government has to come in because individual shareholders cannot have much impact. The institutional shareholders have impact, but, Board is usually in CEO's pocket, and they are just gaming the system for mutual self-interest rather than overall interest of the company while creating the illusion that they are working for the overall good.

However, there has to be a delicate balance, we cannot go overboard either, and that is the message that President, and American people have to send. But, I would not be surprised if the pendulum swings to the other end completely, and short of lynching, there would be signficiant regulation, and controls.

Like Tim I also blame primarily Greenspan and Fed Reserve for the mess. They let everyone take risks, and practically in every difficult situation (1987, russian crisis, asian crisis, LTCM, Y2K, nasdaq bubble burst, 9/11) they created moral hazard. In the process, everyone (including wall street executives, CEO's to common man) that they forgot there is risk, and this herd mentality has impacted us, and for that matter the world.

I have been inspired by your blog, and I have been reading it faithfully - almost since you started it. I am thinking of starting with my own blog on macroeconomics. But, at the same time, I don't agree with some of Tim's blogs on Commodities investments. I do somewhat agree on "Gold" because of our disatrous monetary and fiscal policy. But, I would be still cautious because if there is a depression kind of scenario, gold also would drop. If you analyze, some of those investors would loose appetite - especially the ones who got in after gold hit $600. I tracked gold for a long time when it was hovering between $410-$440, but did not have the stomach to get in, and I lost that opportunity, and never got in. But, that has to do with my risk appetite, and my risk profile.

But, eventually like in great depression, gold is bound to go higher. So, in both high inflation, and depression, we would see gold easily going above $1000 (much higher).

Anonymous said...


I hope I am reading you correctly. There is no such thing as too big to fail, imo. Just let them fall where they will. We have allowed these banks to grow so big through our own ignorance. What people must realize is the real savings is already gone and spent. The cupboard has been raided and is now bare. Deal with the reality. Why continue giving to thieves from what is left. Credit and confidence will not return until the proper level of real savings has been restored.

Anonymous said...

I think some of Whitney's comments are being taken out of context. She is essentially arguing for less government intervention in the banking industry because it will lead to more unintended consequences and ultimately make matters even worse. Mostly, I agree with her - except why not follow that line of logic all the way to abolishing the Fed, thereby eliminating fractional reserve lending and the leverage that allowed this bubble to grow so big?

Anonymous said...

Steve Keen's latest post pretty much destroys the Austrian hang up on fractional reserve banking and the FED. In my mind, his theory of money should give him the Nobel Prize.

Anonymous said...

Could you provide a link to the condensed version of that Keen piece? Something less than a few thousand words maybe?

Anonymous said...

Has anon116 even read the Keen post? Austrian business cycle theory explains/predicts all that we are experiencing and does it rigorously.

TheDailyBail said...

Thanks Tim for noticing us. We're brand new (just 3 weeks old) and so we grealy appreciate your kind words.

We run NO ads on the site and so we can say pretty much whatever the hell we want.

Word of mouth, emailed links and occasional mentions such as this one are how people have found us. So, we really appreciate it.

Thanks again,

Publisher The Daily Bail

We're keeping tabs on the Heist.

An Official Daily Record of the Generational Pillaging.

Tim said...

You're welcome.
FWIW - I run ads but I still say whatever the hell I want...

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