Much ink has been spilled scapegoating the various newfangled nerdy types known as “quants” for the financial apocalypse. As a journeyman member of the breed, I’m considerably dismayed. As I see it, a bunch of Ivy League banker morons are blaming their misdeeds on the quiet boffins fiddling in the corner with their slide rules. We’ve heard plenty from the perfumed princes of the plutocracy, a caste which presently seems to own all three government branches. Perhaps it’s time we heard a few ideas from the tall-forehead set. Quants are people who think outside of the box; their solutions to problems are often elegant and obvious—the type of thing which would never occur to a banker.
Since I know a lot of quants, both from my day job and from my blog, I’ll abuse my privileges as a scribbler and shamelessly tout two good ideas. In the interest of full disclosure, I’ll note that the ideas’ originators have dangled before me the princely bribe of offering to buy me lunch. They did so before I wrote this, so my choice of their ideas is honest. I’m not looking for a job. These guys can’t help me with my business, nor do any of them particularly share any of my political ideals: Their ideas simply make sense to me. This is a guarantee you can’t get from any of the other ideas being floated out there. Politicians are always looking to line their pockets and increase their power. Most of the ideas that get into the public eye, from the recent disgusting “healthcare reform” (brought to you, more or less, by the AMA and insurance companies) to the moral panic over “high-frequency trading” (brought to you by people with a vested interest in keeping trading inefficient) are actually carefully crafted messages paid for by people with skin in the game. These two good ideas are from honest men who only want to see things work better.
The first idea is by David Kane of Kane Capital Management. It is an actual SEC proposal submitted before the financial crisis but which addresses a root cause of America’s financial woes. The idea is as follows:
The SEC should pass a regulation requiring that all publicly traded companies allow their shareholders to vote on the following (binding) resolution each year.
“The total compensation of both the CEO and the CFO shall not exceed $1 million in the coming fiscal year….”
Some would say that this plan won’t work since the companies whose shareholders agree to pay more than $1 million per year (whether they be public or private companies) will snap up all the “best” executive talent. Maybe. But, our ability to measure executive talent is so limited that it would be hard for any company to easily identify a CEO candidate who is significantly better than many other candidates for the job.
I can see some of you shifting uncomfortably in your seats. Is this Locklin character some kind of communist? Nothing of the sort. Most modern corporations are not managed as they were intended. These days, it is normal for high-flying CEOs to obtain tens or hundreds of millions in compensation from corporations they had nothing to do with creating simply because they’re connected enough with board members to land the “job.” At best, these privileged bozos act as a sort of success totem or celebrity. Look at Carol Bartz of Yahoo!, an overprivileged, EEOC-trophy dunderhead who managed to…I don’t know what this brittle chiseler did for Yahoo!’s shareholders. She fired a lot of people and isn’t Jerry Yang, and that’s apparently worth $39 million.
Kane’s rule would make clowns such as Bartz more accountable to shareholders, who are generally asleep at the wheel. It would also tend to lower executive salaries across the board. What CEO is going to want cronies who make more money than them? Finally, if a CEO exists who is really worth more than a million a year, shareholders can vote for him to be justly compensated.
This rule does nothing to privately held companies. It does nothing to entrepreneurs who found their own companies. In fact, it encourages these alleged organizational geniuses to start a company which actually proves their merits. If you’re a CEO worth $100 million a year and can only get $1 million running an already existing publicly traded company, you’ll be that much more inclined to found a new company, thus creating wealth and jobs for the nation. People lose sight of the fact that publicly traded companies do not exist to generate wealth for their executives; they exist to create wealth for the public who owns them. The disgusting oligarchy that has ruined our great corporations with excessive debt, outsourcing, and short-term thinking would be given the pay cut they so richly deserve, and the proceeds would be handed out to the people for whom they were intended: the widows and orphans who own shares in the company.
This rule also does nothing to benefit people such as Mr. Kane, who deals in statistical trades rather than long-term investments. There is an entire class of hedge-fund operators that exists to remove the most egregious examples of executive graft and incompetence. If Kane’s plan were put into effect, a lot of these guys would be put out of business. The fact that there’s a fairly large and profitable set of funds which do nothing but buy these companies and fire their overpaid incompetent executives indicates that there is something dreadfully wrong with American capitalism. As the great predator capitalist and prose stylist Robert L. Chapman put it:
...modern capitalism is characterized by pervasive oligopoly and the separation of management from ownership. For a decade now, I have lamented publicly via Schedule 13D filings how fragmented equity ownership converts capital-risking “Owners” into un-concentrated, faceless, DTC-coded “shareholders.” In this conflicted world of “Agency Capitalism,” a board and its hired hands (together, the “Agents”) conveniently lose sight of the most important fact of their corporate lives: the Agents work for the Owners….
The second quant idea is too late to implement now, but it is likely to come up again as long as our banks remain lunatic casinos rather than, you know, banks. Why was TARP handed out to a bunch of gambling failures? Think about this for a moment. While the financial system was broken and the consequences were terrifying, handing money to the same clowns who broke the system in the first place was…monstrous. Famed Wall Street Nerd David Leinweber and Salman Khan (of Khan Academy fame) had a different idea while this was going on. Why not use the money to start 30 new banks? Since the money comes directly from taxpayers, everyone who pays taxes can be given shares in the new banks. These new banks can be staffed by regional bankers rather than the numskulls who crashed the financial system in the first place. No government ownership, no bureaucratic meddling, no moral hazards: just plain old capitalism.
You might argue that many Americans wouldn’t want their tax dollars funding such an enterprise. I can tell you one thing: Nobody wanted their tax dollars to fund the bailout of wealthy bankers who immediately awarded themselves giant bonuses. At least the Leinweber/Khan plan allows you to sell your stock if you think they’re being idiots. TARP turned out reasonably well so far, but if the poop hits the prop again, a plan like this would be much more salubrious than simply forking the money over to yet another moronic zombie bank. The plan’s genius is that, while TARP injected $700 billion in liquidity into a financial system which desperately needed liquidity to continue doing business, using the money to capitalize banks would actually inject a lot more, since banks are only required to have a fraction of reserves on hand.
It also brings to light another thing which nobody seems to care about, which I’ll claim as my own: Why are these enormous “too big to fail” companies allowed to continue operations as they were before the collapse? If they are “too big to fail,” they need to be broken up into smaller companies which are not too big to fail. The nation doesn’t exist as a pool from which banks siphon wealth. Banks exist to make commerce possible. If these banks are “too big to fail,” we don’t need to guess at new regulations which may or may not tame these beasts. We need to make them smaller. Anti-trust acts already make this possible. All we need is someone willing to stand up to the oligarchs.
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