Saturday, October 09, 2010

Make Wall Street Risk It All - NYTimes.com

Make Wall Street Risk It All - NYTimes.com:

imageWilliam D. Cohan on Wall Street and Main Street
"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.
Create a new security for each Wall Street firm that represents — and is secured by — the entire net worth of its 100 top executives.
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 —

con·cept: Make Wall Street Risk It All - NYTimes.com