Tuesday, June 3, 2008

Reminder from May 10

Shareholders fail to put brakes on directors' pay

At Bradford & Bingley, where profits halved in 2007, directors' pay rose sharply because they were paid a bonus to reflect the fact that their salaries were lower than rivals. And the bank introduced a new incentive scheme which increases the maximum potential cash bonus from 60 to 100 per cent of salary.

Posted by mken @ 11:51 PM (503 views)
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4 thoughts on “Reminder from May 10

  • Precisely why we need to let banks fail. The depositors should be protected only if the bank is a signatory and susbcriber to a Central Bank insurance scheme (which has overwatch duties).

    Let the shareholders swing – they knew the risks.

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  • IVmreader – i wonder if you agree with the premise that the safety net of depositor insurance (although admittedly not 100% to limits per the US) plus dereg since the thatcher Regan era, have de-incentivised both savers and lenders?

    I am more aware of insurance for these issues – eg. in the UK the Policy Holders Protection Act provides compensation for a failed insurer (eg Independent) by use of a levy on others. (that strikes me as unfair – if an insurer undercuts and goes bankrupt in the process the other insurers in effect pay twice – once because they lose the original business and second because they pay for the bail out). But I suppose that means that its in the Insurers own interest to have the other insurers better regulated / more secure.

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  • I am not sure why depositor insurance would de-incentivise savers – I would tend to the idea that it would incentivise them. However, the rates on offer are always going to be lower than more risky investments. It makes no sense to save when the Government is stealing away the value of your nest-egg by inflation. This is why it would be sensible to store gold or jewellery, yet at times of economic crisis, the Government would simply seize all Gold anyway as has happened before in the United States during various extreme financial crises.

    Generally one pays for safety by giving up the higher yields. However, if there is rampant inflation, then you are in fact being robbed if you entrust your wealth to fiat money (without safeguards).

    Giving risk taking banks access to bailout facilities is, in my opinion, a criminal act. Let them fail and bear the consequences.

    The Northern Rock bailout was a disaster because the Govt did not even understand the reasons why NR was in trouble in the first place.

    The rush to protect shareholders and employees was naive – the only thing needed was a helping hand to let another bank / banks pick off the depositor base and leave the fetid carcass to rot away – after having jailed the management for criminal negligence.

    I am not overly familiar with the Policy Holders Protection Act but I would surmise that this would in effect be a type of cartel who could/would set a floor of what members could charge if they wanted to be protected by the group insurance. The original business the others lost would be regained by the survivors (Zhang, G & Jorion, P – “Good and Bad Credit Contagion: Evidence from Credit Default Swaps”).

    It now becomes so clear why the Glass Steagall Act of 1934 was passed – to prevent the very same risky behaviour and moral hazard of which we are now are all victims. Again.

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  • IVM Reader – thanks. Yes by de-incentivised savers, i mean they have no real reason to look at the people that they are investing their money with because they will be bailed out if the institution fails.

    Risk taking banks yes i would agree, and thats why i also agree with you re the Glass Stegall act – the repeal of which is no coming home to roost. Let them fail. But the high street banks – isnt the risk of contagion too great? I mean the problem is that we left things get here – by de-reg for example.Now they are here i cant see we can let the retail banks fail.

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