more on the subprime implosion
Congress is pissed at financial execs who left with giant severance packages after their banks lose billions of dollars - a scale large enough to affect the overall US economy, forcing the Fed's hand to drop interest rates in order to retain a modicum of stability and effectively distributing the cost of these failed banks to the general populace through inflation.
(image from indexed.com. click through for original post)

More on financial incentives for bankers which contributed to the bubble/crash. Essentially: the success or failure of these "financial innovations" like CDOs cannot be measured in quarters - realistically, more like 5-10 years; paying out bonuses quarterly creates a structure in which short-term gain is encouraged even at the expense of disastrous long-term results. There's a phrase for this in economics: moral hazard. (This applies to the loan originators as well; incentives for them to come up with as many loans as possible, regardless of quality, were in part due to the complete lack of short-term risk - and only indirect mid- and long-term risk, once loan buyers figure out the originators' loans have a high default rate.)

This is not to say the financial industry players involved in structures where true risk is not understood in the short term should be denied bonuses, but rather, as the article suggests, have them paid out over time based on long-term results. I would go further and have employers' set aside bonuses for payout x years down the line and allow employees to borrow against that amount - imposing significant risk on the individual employee, should their machinations fail them.


Another Financial Times article on a recent Moody's (ratings agency, arguably a big part of the subprime problem) note to their clients in January. Wish I could find the full text of it, it's well-written and spot on in a couple of areas, though it does downplay the ratings agencies' role in recent financial crises...



Bought your house in 2006 or so? Whoops, there goes your equity. You might be able to break even if you sell in 5-10 years...

- posted by vcmc @  3/08/2008 12:58:00 PM