Sea Change Blog

ViewPoint: Nell Minow with First Steps on Toxic Assets 

 nellminowNell Minow was dubbed the “queen of good corporate governance” by BusinessWeek.  With Bob Monks, she co-founded The Corporate Library, a Portland, Maine-based corporate governance research firm.  In this week’s Sea Change ViewPoint, she proposes first steps on toxic assets.

Otto von Bismarck usually gets the credit for observing that those who love laws or sausages should not observe how they are made. These days it is clear we must add the making of money to that list. The bailout payments to the banks and other financial institutions have given the American people a closer look at what goes on at the places where more people get paid more money than anywhere else on earth or at any time in history, and it isn’t pretty.  The American people understand mistakes and we are always ready to extend a helping hand to members of our community. But we cannot tolerate selfishness and we cannot accept unfairness. Wall Street has failed badly, tarnishing not only its own brand but also the brand of American capitalism.  

We love to see people get paid buckets of money for doing their jobs superbly, from Tiger Woods to Bill Gates, but it is infuriating to see executives at AIG get millions of dollars in “retention” bonuses that are awarded just for staying in their jobs, especially as unemployment rates are spiking. It is also no comfort to see Congress respond to our sense of outrage by trying to tax these bonuses with a bill that is probably unconstitutional and almost certainly ineffective. It is time to stop playing whack-a-mole by attacking the symptoms of the economic failures and start treating the disease.  

The Administration’s plan to find a way to take the “tarnished assets” off the books of the bailout companies is an important step in the right direction. Ground zero for the crisis is a big pile of securities we used to think were worth a lot of money. Now no one is sure how much they are worth. A lot of the fuss over the past six months has been about how to figure that out. That includes the AIG bonuses, by the way, which, thanks to the same corkscrew thinking that got us into this mess, were based on the idea that we had to pay the people who thought up these securities extra to stay on and help us figure them out. 

These securities aren’t just tarnished; they are all but radioactive as they are currently held. The new plan will make it possible for these assets to find a good home. It’s a huge improvement over the Paulson plan, which would have had the government buying the assets and trying to sort them out. The current plan encourages non-government sources to buy the securities. A market-based approach makes it possible for the kind of people who are good at ferreting out value to start making sense of these securities. The government’s role will be to support the transactions and provide a floor for the losses. Most importantly, the taxpayers will benefit from any increase in value, an element that has in the past been omitted from government-subsidized programs. 

Critics complain that it’s yet another welfare payment to Wall Street bankers, privatizing gain while socializing risk. They have a point. It is never ideal to set up a system where the buyer gets most of the upside if the asset pays off and the taxpayer takes the hit if it doesn’t. But it’s a price we have to be willing to pay to get these assets sorted– and it beats the alternatives. 

But there’s more we have to do. First, we need immediate and comprehensive disclosure about the program. We should be able to track every bailout dollar and every tarnished security online in real time, along with data about the quantity and amount of loans the institutions are making after receiving government funds. And every company taking bailout money must commit to deferring bonuses until the government has been repaid. 

We should also make sure that executives don’t simply replace their near-worthless stock options with new ones at the current depressed stock prices.  Any new stock options should be structured so that they don’t pay out unless the company’s stock outperforms its peer group. We don’t want them to make money just because they got to time the grant at a market low. Third, as a major shareholder, the government must insist on immediately replacing some board members at each of the bailout companies. The primary tasks of the board are risk management, strategy, and incentive compensation. These boards failed badly at all three; the people who got us into this mess are not the ones to get us out of it.

When Warren Buffett was running Salomon, he famously told the staff: “If you lose money for us, we will be understanding. If you lose reputation, we will be ruthless.”  Wall Street executives and boards of directors have damaged the reputation of their companies and of American capitalism. It’s time for us to be ruthless in insisting they meet the highest standards of professionalism and integrity in rebuilding their credibility — and ours.

For the Sea Change ViewPoint, I’m Nell Minow of The Corporate Library.