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January 2, 2008
Betting the bank
To get the banking system working again, “there have to be punishments as well as rewards,” says Matthew Lynn in Bloomberg. And that means that annual bonuses should be “repayable.” The heads of Morgan Stanley, UBS, and Bear Stearns “are to be commended” for foregoing their bonuses this year, but they should also “give back some of the money they made in 2006.” Executive compensation at investment banks “increasingly resembles a casino,” where CEOs are encouraged to gamble “furiously” because if they lose the bets, they don’t lose their shirts.
You can blame some of the risk-taking on “deregulation and competition,” says Nicole Gelinas in the New York Post. Until those two kicked in recently, banks could earn “hefty returns” through fees for helping other people take risks. Now to earn “decent money” they have to “jump in and take huge risks on their own.” The banks thought they could offset the risks by spreading it around, “but this strategy doesn’t seem to have worked too well.” And shareholders and lenders, who should have expected the “inevitable” huge losses, “seemed stunned instead, fleeing bank stocks in droves.” Welcome to “the bad side” of “this new world” in banking.
of The Week magazine.