Here’s an Idea . . .
. . . since the Geithner-Summers team seems to be looking for them.
Why not say that all bank compensation above a baseline amount – say, $150,000 in annual salary – has to be paid in toxic assets off the bank’s balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. A federal regulator can decide which assets to pay compensation in; if they were all fairly valued, then it wouldn’t matter which ones the regulator chose. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there – at the value that they insist they are worth. Of course, the average employee does not get to set the balance sheet value of the assets, and may not have been involved in creating or buying those particular assets. But think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations. (Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.)
We can dream, can’t we?
Outstanding idea Mr. Kwak. Somehow I think the elites will not tolerate this kind of innovative thinking. But yes, we can dream.
Matthew Redard
February 8, 2009 at 3:46 pm
In fact, this is what Credit Suisse did with their bonus plan in 2008. It linked the bonus payouts for its top investment bankers to illiquid assets
Martin
February 8, 2009 at 3:56 pm
Perfect.
Cheers,
Carson
Carson Gross
February 8, 2009 at 4:42 pm
Absolutely brilliant. My sunday looks much more cheeful now!
Manshu
February 8, 2009 at 5:04 pm
And employees at firms where valuations were too high would be penalized; they would pay taxes on 100% of the book value… so if the asset were only worth 50% of book, the bonus would actually cost them money.
Definitely one way to get employees to vote with their feet (and for them to stop yearning for a year-end bonus).
C Dan
February 8, 2009 at 6:09 pm
ok, pay me in toxic assets.
i will promptly advertise them for sale for 5 cents on the dollar, in the wall street journal.
how’s that for price discovery?
oh, and please forward any future calls about purchasing securities directly to my cell phone.
han
February 10, 2009 at 9:02 pm
[...] Here’s an Idea . . . « The Baseline Scenario . . . since the Geithner-Summers team seems to be looking for them. [...]
Thomas Frank » Here’s an Idea . . . « The Baseline Scenario
February 11, 2009 at 12:37 am
[...] http://baselinescenario.com/2009/02/08/heres-an-idea/ [...]
blog-thing : Beautiful…
February 11, 2009 at 2:13 am
95% of the public was against the bailout but Wall Street bought the representatives (74% voted in favor). How about having our representatives insure the value of these public bailout “investments” with their personal wealth as collateral?
Steve Dekorte
February 11, 2009 at 4:47 am
[...] “The Baseline Scenario” propose an beautiful solution to our gloomy recession: Banks are desperate to offload their toxic assets, and bankers are desperate to get their [...]
An economic-hack to end the recession? at Stodge.org
February 11, 2009 at 4:57 am
Briliant!
Luna Redman
February 11, 2009 at 7:52 am
Nice, best idea I have ehard yet. SOmeone should pitch this to Obambi!
RT
http://www.anon-tools.us.tc
John Woods
February 11, 2009 at 8:45 am
Credit Suisse already did this:
http://www.reuters.com/article/ousiv/idUSTRE4BH5MT20081218
But many of the US banks have many more billions tied into toxic assets…. so in the end they would still be losing billions of dollars.
Kevin
February 11, 2009 at 9:08 am
huh. accountability. incentive. keeps things in check.
lortz
February 11, 2009 at 9:44 am
While I agree with your sentiment, you’re numbers are way too low. Don’t think for a moment that the executive salaries are anywhere near as low as what you’ve stated. And bonuses? Please. The amounts you’ve stated affect hard-working people supporting families that have absolutely nothing to do with the “talent” that put us where we are.
The issue is that all the top execs are in bed with each other via their respective boards. “I’ll give you a great severance for bankrupting your company and you do the same for me.”
Banker
February 11, 2009 at 9:56 am
I used to be a homeless rodeo clown but now I am a world class magician !
FPM
February 11, 2009 at 10:05 am
Excellent!
Re-posted at http://metasurfing.blogspot.com/2009/02/how-to-solve-toxic-asset-problem-give.html and facebook, let’s spread the word!
arpie
February 11, 2009 at 11:09 am
How about letting these companies fail?
The $500K cap is way too high, I live & work in Midtown NYC. $200K is more than enough.
Eddie
February 11, 2009 at 11:57 am
The biggest flaw of the bailout is conceptual. They are holding assets that have little value..or less than what the banks would like to sell them at.
It doesn’t matter if you solve this problem…that is the problem with dicking around trying to solve it. The core problem is that there are not enough places to park investment. 1 sentence.
We can talk about the bad assets and the mistrust all we want…but this is how a bust looks, fear to lend existed countless times before. It looks about the same each time, only with new wrinkles. Securitization isn’t the problem, too much wealth at the top is the core problem..only solving that will end the depression.
Evan
February 11, 2009 at 1:32 pm
Another name for Regulation is “Laws”. So when somebody says they support deregulation of Wall Street, they actually want to make Wall Street a lawless domain where everything is legal, nothing is unethical and only fools have morals.
Rick Cain
February 11, 2009 at 3:35 pm
Brilliant. I haven’t fully thought this through, it occurred to me that that would leave the high flyers with a paper, that they will want to be able to spend, somehow … either by exchanging for dollars in an open market (including the remaining inventories) … thus establishing actual present market value, or by simply trading assets with other people who have what they want, e.g. barter. “I’ll trade you 4 GM’s for your junk mortages.”
Everyone knows barter is awkward and impractical for an economy of this size … but what would be feasible would be for the toxic assets to be issued in paper form, and in small denominations. A similar situation existed before the Fed with individual banks issuing notes that served as money. These guys love to securitize everything, any, so why not force them to bundle the heaps of paper in a manageable number … (six?) … the relative value of which could be sorted out on the Forex of a similar new market.
bankers who overvalued in the extreme would be punished the most, and those who were above board would receive compensation closet the purchasing power they would otherwise have had if they had been paid directly in dollars.
The baseline suggestion seems to clean up the immediate mess … and could lead to a situation where is simply put of business, because, while the value of the toxic assets is not known at this time, they do represents assets like land, homes, businesses.
I thought there might be a path to asset-based money without returning to a gold standard, a path to ending the Fed’s fiat money system, and a more sound and less suspect economy on which to build on, on our way out this mess.
Does this extension of the Baseline idea have any merrit?
starfish
February 11, 2009 at 3:46 pm
[...] Kwak writes: Why not say that all bank compensation above a baseline amount – say, $150,000 in annual salary – [...]
February 11, 2009 « Quis Custodiet Ipsos Custodes?
February 11, 2009 at 4:49 pm
These assets are probably CDOs with a minimal value of $100 million. You can’t break them up into $10,000 pieces. I love how this crisis had suddenly made every jackass a financial expert with “the solution”.
anon
February 11, 2009 at 5:46 pm
Actually, it’s pretty simple. The bank creates a fund and puts the assets in the fund. Employees get shares in the fund, just like any other mutual fund. If they want to redeem their shares, they put in a redemption request, and the fund sells enough assets to pay out the redemptions. There are lots of other problems with this idea, but that isn’t one of them.
James Kwak
February 11, 2009 at 6:09 pm
[...] bankrupt or be offered for free to willing persons. What should the U.S. government do? Some other blogs said that they should be given to the bank executives, instead of their salaries. Nice try. But [...]
DoItInvest - investing blog, investment tools, financial analysis, portfolio management » Blog Archive » What To Do with the Toxic Bank Assets - Give Them for Free to Citizens
February 12, 2009 at 6:50 am
This idea has got to be made viral. Get it out to everywhere on the web, and force those in “power” to adjust to what the people want to do with those assets. After all, we in effect already own a large chunk of the banks already.
salesanalyst
February 12, 2009 at 1:13 pm
excellent idea and most comments agree except for the one rude person that says “These assets are probably CDOs with a minimal value of $100 million. You can’t break them up into $10,000 pieces. I love how this crisis had suddenly made every jackass a financial expert with “the solution”.” I note that this comment is anonymous – who’s the jackass?
Triona Carey
February 13, 2009 at 1:02 pm
Further. All lobbyist bribes to politicians should be paid in toxic assets.
And let them give “$100 million” CDOs at a time. It’s not like it’s real money, anyway. At least, not until Congress tried to make it into real money. Let them take it as bribes, instead.
wagelaborer
February 13, 2009 at 5:25 pm
In the sixties, I remember someone suggesting that you could show your displeasure with a corporation by mailing their Postage Guaranteed envelope to a cinder block and posting it. Never tried it but my mail deliverer thought it would work. Maybe a credit card soliciation envelope full of blank pages would serve to show your dissatisfaction with there bank.
Ingite your rage, use you consumer voice, move your cash deposits.
Curtis
February 14, 2009 at 12:40 am
you (and others) inspired me to blog about the new ideas we should turn to instead of propping up bad business and putting up with more of the same. It’s at http://short.ie/rulabula – interested in your thoughts on it
Triona Carey
February 16, 2009 at 10:47 am
[...] Here’s an Idea . . . « The Baseline Scenario [...]
Wow, that 2blog folder is full. | J's blog
March 8, 2009 at 10:59 pm