Mark Williams Tells Boston Herald, “High-risk Finance Nothing to Bank On”

in Faculty, Finance, News, School
September 21st, 2012

Mark-Williams

Mark Williams

On September 18, the Boston Herald published the following opinion piece by Boston University School of Management’s Mark Williams. Williams is an expert on risk management and a master lecturer in finance, as well as a former Federal Reserve examiner and author of the book Uncontrolled Risk: The Lessons of Lehman Brothers.

High-risk finance nothing to bank on

It has been four years since the collapse of Lehman Brothers yet we have not learned the lessons from this financial Armageddon.

An economy can only be as strong or weak as its banks. When bankers misbehave and take excessive risk, they put the economy at risk.

In the last three decades the share of banking assets to Gross Domestic Product has increased threefold. Today the top six banks represent more than 60 percent of U.S. GDP. As the economy becomes increasingly financialized, how bankers conduct their business matters.

“Excessive risk taking and unethical behavior on Wall Street remain strong.”

Excessive risk taking and unethical behavior on Wall Street remain strong. In the last year, oversized risk taking and unethical practices caused the collapse of MF Global, $5 billion in trading losses at JP Morgan, LIBOR price fixing by Barclays and money laundering accommodation by HSBC and Standard Chartered. The common thread in each of these big bank misdeeds is oversized bonuses motivate bad banker behavior. Bankers gamble with shareholder, FDIC insured funds and the health of our economy because they can.

For bankers it was the bonus scheme that made them do it. When JP Morgan lost billions in a risky trading strategy this past spring, the same department had made billions in the three previous years. Executives raked in millions. JP Morgan decided it was willing to risk billions to make billions. This time the coin toss came up tails. Without overly generous incentive systems, the motivation to roll the dice is reduced.

“What policy makers and bank regulators need to understand is that excessive bonuses only motivate excessive risk taking.”

Post Lehman, inappropriate incentive systems remain alive and well. This is not just a U.S. problem but a global problem. Last year, the average CEO salary for the 15 top U.S. and European banks increased by over 12 percent, topping $12 million. This is despite the fact that the economy has suffered the worst recession since the Great Depression. Ironically as CEO bonuses reach the stratosphere, worker wages as a percentage of the economy have hit record lows.

The Dodd-Frank Act passed in July 2010 has attempted to reduce excessive risk taking. Some of its features, including limiting leverage, and identifying and tracking systemically significant banks, are good first steps. However, neither Dodd-Frank nor banking regulators have addressed the risk of excessive bonus systems. What policy makers and bank regulators need to understand is that excessive bonuses only motivate excessive risk taking.

Until bonuses are dramatically downsized, bankers will continue to swing for the fence and put our economy at risk.

See this piece online at the Boston Herald.