The financial meltdown and management greed

Absolutely perfect morning to run: cool, clear and just a light breeze. In fact, it was such a great run that I find I’m actually fairly relaxed about the financial meltdown taking place on Wall Street and Main Street. Probably shouldn’t be — since I’m sure we’re in for more bad news before anything positive happens. And yet. Why worry? Be happy! What can you do?

Well, nothing, actually. We got ourselves into this mess because we believed that personal debt didn’t matter. And because the greed, corruption and incompetence of people throughout the financial industry was very real — and very damaging. Another reason. The men and women who are hired to manage publicly traded corporations — including what’s left now of what was once known as the financial sector — benefit financially no matter had pathetic their decisions or the results of their actions.

In other words, there ain’t no risk at the top. And until that changes — and it most likely won’t — we’re always going to find ourselves facing these types of problems. And if there is one positive in this current meltdown, it’s that the U.S. government didn’t bail out Lehman Brothers. An editorial in the Akron Beacon Journal, “Casualty count,” this morning has it absolutely right.

“Henry Paulson, the treasury secretary, made a reasoned judgment. He concluded that taxpayers cannot be expected to save everyone on Wall Street. Or put another way, the supposed financial wizards must share in paying the steep price for their colossal errors, for their arrogance and greed.”

Unfortunately, the “supposed financial wizards” have flushed a lot of good people down the drain with them — home owners who took on mortgages they couldn’t possibly manage; employees who left their offices yesterday carrying their personal belongings in boxes.

So this gets us now to a public relations question. How are we going to restore trust in the financial markets — and in the company executives who are always so reassuring right up to the time when they are grabbing hold of their golden parachutes?

For one, shareholders should demand that the captains of industry work just like everyone else — without grossly unfair and obscene severance packages. In part, corporate management argues that these packages are necessary so that they will work in the best interests of shareholders in the event of a merger, takeover, etc. And boards of directors — who should be acting on behalf of shareholders — argue that you can’t hire excellent management talent unless you match what everyone else is getting. Neither of those pigs (oops, probably wrong word) fly.

But here’s the point. If you take the risk out of decision making, then why would anyone fret over making the right decisions? They don’t.

For instance, until he was bounced from his job in October 2007 as Merrill Lynch’s CEO, Stan O’Neal certainly played a large role in the decisions that led yesterday to the company being acquired by Bank of America. But for O’Neal — so what? He walked away with a reported severance package of $160 million. Wonder if he had to carry his belongings out in a box?

Then there are Freddie and Fannie, now wards of the U.S. government. The Treasury Department had to keep them from going belly up — but amazingly enough, the guys in charge of both companies were still in line to receive multimillion-dollar severance packages. Better not spend that money just yet guys. It seems that there is actually some public outrage against this crap — even to the point where Obama and McCain jumped in to protest the payments.

Here’s from the Wall Street Journal online (by subscription only), “Regulator Plans to Bar Big Severance“:

The regulator of Fannie Mae and Freddie Mac said Sunday that it won’t allow the companies to make “golden parachute” severance payments to the mortgage companies’ ousted chief executive officers.

In a statement, the Federal Housing Finance Agency said such payments wouldn’t be made to Daniel Mudd and Richard Syron, despite provisions in their contracts. Mr. Mudd served as chief executive of Fannie and Mr. Syron was chairman and CEO of Freddie until last weekend, when the regulator seized control of the companies, saying they were in danger of running out of capital.

News reports that the two executives stood to receive millions of dollars in severance payments under their contracts triggered public protests from numerous politicians and inspired political cartoons in newspapers.

Good. It’s a start toward restoring public confidence. Add some risk for the guys and gals with the responsibility for making the right decisions. Mudd’s exit package was valued at between $6 million and $8 million; Styron’s about $15 million. Pathetic.


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