May 23, 2011
I’m writing because my family and I were affected by the economic collapse of 2008, and we don’t want it to happen again.
I was born in 1952. My parents both survived the Great Depression whlie they were in high school. I grew up with the understanding that banks and bankers were to be conservative "with our money." going to school at the U of Missouri, I studied journalism, but recall from hearing my business major friends talk...that was the banking profession: Conservative. So what happaned? The S&L Crisis of the early 1980s, the banking crisis of the late 2010s? Why? You know the answer. Do you have the guts to fix it?
Wall Street greed and outrageous pay practices were a major cause of the collapse. One way to change the incentives so they don’t collapse our economy again would be for regulators to use a *safety index* for incentive compensation, instead of a profit index.
Currently, most bankers receive stock options. So if they can generate more profits, the stock price goes up, and their options become more valuable.
Instead, what if they used the bank’s bond price, which measures the overall ability of the bank to repay its own debt? Another measure of bank stability is the spread on credit default swaps (the insurance-like policies that are essentially bets, where one gambler bets with another that a particular firm will fail). The closer a bank comes to failing (such as in failing to pay of its bond debt), the bigger the spread on credit default swaps.
Thank you for considering my comment:
Dan Grothaus