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by Peter A. Belmont / 2009-02-04
© 2009 Peter Belmont
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Knowing owner-participants in the bad-banking tragedy should pay the price of bank bankruptcies.
But what of innocent owners (pensioners whose pension funds are invested in banks, and owners of non-bank-focused mutual funds)?
Is there a way to bail out bank-owners selectively, so that bank managers and major (“knowing”) shareholders are bankrupted, but little guys are rescued? This is a flip side to rescuing home-owners caught in bubble-inflated mortgages.
Businesses are managed (and lobbyists directed) by managers who are more responsive to their individual interests (pay and perks) than they are to the interests of the owners of the corporations. This must change. Institutional owners (pension funds and mutual funds) must, in the aggregate, exercise more control over executive decision-making (and executive pay) than they have traditionally done.
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I like Dean Baker’s proposal for bank rationalization, “Bad bank, bad plan”, Guardian (UK), February 2, 2009.
I want (non-innocent) shareholders to take a “bath”. Those who bought CDS (insurance on toxic investments), like those who sold it, are dinosaurs who have outlived their place in history. This is the law of the jungle and should be the law of the capitalist marketplace. The public fisc should not be called upon to bail out the guilty.
And how else will banks and other institutions be “trained” and, eventually, “controlled” not to do all this again? Shareholders have—and must be “trained” to exercise—their power over management of executive salaries and perks and management of other executive decision-making. And not just in banks.
Immunity and impunity are bad ideas, generally. Banks should not be immune from the ill effects of their own failed policies and actions. [1]
Massive bank bankruptcy would serve to advance this “training” which today’s capitalists (shareholders and those acting as trustees for them) seem to have forgotten, as they turned over more and more control to managements which enriched themselves without advancing the interests of shareholders.
That said, I must confess a nagging desire to protect “innocent” shareholders. By this I mean state and union and industrial PENSION FUNDS and also non-bank-focused MUTUAL FUNDS whose managers may have (innocently) supposed that the US federal government regulated banks (Oh!, over-simple and old-fashioned idea!, but perhaps an idea whose time has again come) and purchased bank-shares and bonds as “safe” investments, particularly if the usual rating agencies pronounced them sound (“AAA” and the like).
In effect, there was a “bubble” for the banks as well as in real-estate. Many home-owners, now facing foreclosure, were hurt in the housing bubble, and the US government is now seeking ways to help ease their pain. Perhaps some attention could be given to easing the pain of those (small) owners of mutual funds which bought bank stock or bonds, and (small) pensioners whose pension-funds did the same.
Big institutional investors must take their lumps and must be trained to use their ownership “clout” to control the companies whose shares they own (and, mayhaps, to control a Congress overly responsive to lobbyists who are overly responsive to corporate managers and too little responsive to owners of the corporations).[2] Managers, it is now clear, are not to be trusted to manage large businesses in the interests of the owners of those businesses.
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[1] Similarly, no-one should be immune from punishment for violations of law. Thus, for example, members of the administration of G. W. Bush should not be immune from punishment for their individual law-breaking, if any. The US and its soldiers should not be immune from the action of the International Criminal Court. Widely anticipated immunity is a recipe for wide criminality. See other essays on this blog with respect to Israel’s violations of international humanitarian law, especially the Fourth Geneva Convention.
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[2] ”American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster.” See:Nationalized Banks Are ‘Only Answer,’ Economist Stiglitz Says
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