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Friday, 26 September 2008
While the US anguishes over whether to provide socialism for bankers or not, Colin Twiggs provides some real insight into the past and present. His thinking is as follows:

"Congress is chewing over Henry Paulson's $700 billion bank rescue plan. Everyone is angry that the crisis has occurred and the natural reaction is to seek revenge — to ensure that bankers pay the price for their follies. By vetoing the rescue plan they will succeed in this, but there are further consequences: Main Street will pay a far bigger price than Wall Street.

"In 1929 the Fed's attitude was to let the banks fail. Repeated failures, however, caused investors to lose faith in the banking system. Withdrawal of deposits forced banks to withdraw credit from borrowers. Borrowers, forced to liquidate assets, drove down asset prices. This in turn set off another round of bank failures. A downward spiral commenced, with waves of bank failures, collapsing asset prices and rapid contraction of demand and production. The Great Depression lasted almost ten years — and a similar scenario should be avoided at all costs."

Twiggs then goes on to offer his suggestion:

"The best way to prevent a repeat is to take immediate action to restore confidence in the banking system. While Congress do not want to give Henry Paulson a blank check, he has shown greater leadership than anyone else on this issue. As well as demonstrating a keen interest in protecting taxpayers . In fact we will all be deeply indebted to him if he is able to pull this off.
The $700 billion facility should not be used to buy distressed assets at market value, the prices paid by so-called "vulture funds" in the market place, and not face value or book value."

Then he brings in Warren Buffet, referring to his recent CNBC interview:

"Buyers in the current market expect to make a 15 to 20 percent return — and Treasury should show a similar profit. Provided that they are given reasonable leeway to negotiate — and are not hobbled with too many restrictions."

In conclusion, Twiggs looks at the underlying issues:

"Executive compensation is a market-wide issue and not just limited to the financial sector. The real issue is the lack of accountability of senior management, who are able to vote themselves remuneration and incentives which conflict with the interests of shareholders. Bonuses and executive options focus management on short-term profits and the current stock price, rather than long-term survival of the company. Compensation committees and compensation consultants are merely window-dressing — in most cases they are indirectly appointed by management.

"Shareholders' interests are not being adequately represented. Directors are supposed to represent shareholders but are often appointed by the Chairman or CEO and feel obliged to support them. We used to joke:

'What is the difference between a supermarket trolley and a non-executive director? The trolley has a mind of its own. The other can hold more food and drink'.

"The board of directors should not be an "old boys club". What is needed is some mechanism whereby non-executive directors are not nominated by the board, but directly by shareholders — and should be accountable to them."

Those of you who read Colin Twiggs know that he has been predicting this crash for quite a while. Good information.

Do you think this has some bearing on leadership, trust and sustainability? I do.
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posted by Dr Ron @ 10:37   0 comments
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