Saturday, March 21, 2009

Financial institutions have been paying bonuses for bad behavior for 5 years

Compliance officers have noticed. See the article March 20 on

Chevy Chase Bank passed by the get-rich-quick schemes, just as it did in the 1980s when the Republican Keating Five brought down the American Savings & Loans. The reason? - SnLs were issuing the same kind of "liar loans" that brought on the financial crisis today. Those loans would never be paid back and the institutions knew it. The difference in banks who survived versus those that didn't, then and now, was the existence of strong compliance departments who looked out for the long term health and survival of the company.
The Corporate Library, which researches and reports on corporate governance, began criticizing the [Countrywide, the first and leading subprime lender] in 2004, when it was a Wall Street darling with a surging stock price.

What did the Corporate Library notice? The CEO's pay package... wasn't the long-term sort that governance consultants recommend; his bonus was calculated in part by the rise in the stock price from the previous year.

Why make such a big deal over pay? Nell Minow, The Corporate Library's co-founder, says that CEO comp is "overwhelmingly" the most consistent predictor of poor performance. As her Countrywide report explained: "Any board which can make such poor decisions about a CEO's compensation package is almost certain to be making poor decisions elsewhere in its range of responsibilities." In fact, all the companies that received bailout funds to date were rated D or F by her group, ratings based in large part on skewed executive compensation, she adds.

1 comment:

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