Tuesday, August 4, 2009

And that, my friends, is the problem

First read this:

Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein has urged staffers to spend money with discretion this year as the public is upset with the huge planned bonus pools for banks many believe would not have survived without taxpayer bailouts, the New York Post reported on Tuesday. The report said that Blankfein began cautioning staff last year about lavish spending, but has stepped up that campaign with orders to senior managers to dampen expectations about likely bonuses, which are based on full-year results and not yet assured.

Now, think about it:

When profits are based on this years results there is a strong incentive to, umm, I don't know, issue mortgages (or other products) that people can't afford in order to get a bigger bonus. Perhaps, a better system, would be having profits based on the results of a rolling five-year period based on things people can control.

The only way out of this system is to either think about compensation systems (incentives and reinforcement) or let firms fail. you can't have it both ways. That is, you can't encourage poor behavior with compensation and then use taxpayer money to bail out companies when it goes wrong.