John Makin at the American Enterprise Institute writes an always insightful monthly economic commentary. In the just released December issue he takes aim at US investment bank chiefs who were asleep at the wheel as the credit crisis began to unfold. In addition, he discusses the very delicate position the Fed Reserve now finds itself in.
Firstly, Makin targets Merrill Lynch CEO Stanley O'Neal. Having presided over huge losses at the bank, investors may think that O'Neal is just plain stupid. But Makin suggests otherwise:
"While investors in Merrill Lynch could check a website that records the scores of serious golfers and learn that Stan O'Neal played twenty rounds of golf between August 12 and September 30, 2007–as the first phase of the credit crisis was raging–they could also observe his $48 million bonus in 2006, which made him the second-highest paid CEO on Wall Street, together with his exit package estimated at $150 million, and conclude that this man was no idiot."
Who says you have to work long hours to receive the big bucks? Nearly a round of golf a day while the firm you lead is bleeding money…not bad, but that's not all.
"He had negotiated a compensation package that paid him a total of more than $50 million in 2006 to take extraordinary risks and then paid him again in 2007 even when those risks resulted in billions of dollars of losses for Merrill Lynch shareholders."
If anything good comes from all this wealth destruction, it will be greater vigilance from company Board's, and certainty greater accountability from senior management.
Makin then goes on to discuss the dilemma facing the US Federal Reserve. He argues that a slowing economy and escalating credit issues will pressure the Fed to keep cutting rates, at the risk of unleashing long term inflationary forces.
"As U.S. growth begins to slow and perhaps even turn negative at the end of this year and early next year against the backdrop of an intensifying presidential campaign, the pressure on the Federal Reserve to reinforce riskier behavior by additional easing, even as inflation rises, will become intense."
"Central banks also need to emphasize that commercial and investment banks that jeopardize their balance sheets and earnings by acquiring too many risky assets will not be bailed out by inflationary monetary policy".
Good advice, but what central bankers should do versus what they will do are likely to be entirely different.
