Column
The Wall Street FreePasser Problem: Accountability is Still the Answer!
My initial entry on the FreePasser epidemic afflicting our society seems to have accomplished its purpose, which was to increase awareness and to generate a thought-provoking reaction. This is designed to be a forum to discuss the problem and to generate potential solutions. Otherwise, we will not find a long-term answers to the current disaster in which we find ourselves.
Who is Responsible is Less Important Than Solving the Problem
Because of the disastrous consequences involved, there is an incredible desire to punish those responsible, and I agree that this is necessary. However, it is more important that we reform the system to prevent this from happening again. Punishing those responsible will flow from this naturally.
If this dialogue degenerates into a witch hunt, all of the same behaviors will occur again. There is plenty of blame on both sides of the aisle in this crisis.
Accountability, Not a New Bureaucracy, Must Be the Centerpiece of New Wall Street Regulations
Accountability for those involved must be the key objective of any new regulations. If there is no accountability, we merely substitute dysfunctional regulatory bureaucrats for dysfunctional business executives. Where were the regulators during the current crisis?
Let’s assume that these new regulators are focused on doing the right thing. Who is going to win in a battle between a $50,000 per year regulator and +$1,000,000 per year Wall Street executive with massive resources at his disposal? The answer lies in making that Wall Street executive accountable even when no one is watching.
The Answer to Wall Street Accountability Is in the Past
You may say that getting Wall Street to self-regulate itself is impossible. I disagree. In fact, a possible answer lies right in front of us.
At one time, Wall Street consisted primarily of privately owned partnerships. It was considered the long-term answer to wealth and success to become a partner in one of these organizations.
However, when you became a partner or managing director, your cash compensation actually decreased because you bought your way into the partnership. Almost all your net worth was tied into the organization, and you did not have access to it until years after you left. If you needed money beyond your salary, you had to take a personal loan. If the organization imploded, you were ruined financially. This led to an incredible pre-occupation with risk by senior management. When I was at Morgan Stanley, it was still a private organization. Senior partners watched over us like hawks to avoid undue risks. Rule #1 was not to kill the Golden Goose, the organization’s reputation and stature, and that promoted accountability.
This changed as the investment banks went public. Yes, disasters surely occurred when Wall Street was private, but the disasters that affected the health of our financial system largely occurred with public organizations in which senior executives had much less of their capital at risk and thus were less accountable.
We may not be able to return to the private partnerships of the past, but we must find a way to restore some of the accountability associated with them. This may not be the entire solution, but it is certainly part of it.
Tags: Accountability, blame, bureaucracy, partnerships, regulation, risk, Wall Street
January 19th, 2009 at 9:34 pm
Hi Doug,
I’m glad you’re continuing the dialogue - and I enjoy your suggestion about putting partners at personal risk. However, it’s not likely to happen. You might want to examine the role of the Board of Directors of many of these banks. Very few of them have been called out - or held accountable. Yet, they are supposed to be an important part of the oversight. You might write about the cozy relationships in thousands of companies where boards rubber-stamp egregious behavior (remember Tyco?). You could probably name half a dozen major banks and financial institutions right now where the Board doesn’t really know what’s going on - and doesn’t really care as long as they have their connections to power. That’s the essence of free passers - they are connected financially and socially and they use these connections to create systems that support them and protect them from consequences. Even though this behavior has been around for thousands of years, we still need to check it and balance it. In Lord Acton’s memorable phrase - power corrupts and absolute power corrupts absolutely. In her brilliant book, Political Fictions, Joan Didion articulated how there is now a ‘political ruling class’ in America that transcends party lines and basically runs the country - free from elections, regulation, or challenge. Worth reading. Because it shows how difficult it will be to root out Free Passers who make the rules. I look forward to your next installment.
January 20th, 2009 at 11:22 am
John,
The Board of Directors problem is closely linked to the ownership. This definitely will be the subject of a future entry. Thanks for the suggestion.