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MSN’s Brush explains why the housing bill may not prevent future financial disasters
By Lauren | July 28, 2008
Over the weekend, Congress passed a massive bill designed to calm investors and pacify voters in the wake of the subprime mortgage mess. The bill provides for homeowner tax relief and a $300 billion program to prevent foreclosures. The bill also establishes a new paradigm for embattled financial giants Fannie Mae and Freddie Mac, increasing their $2.25 billion lines of credit with the Department of the Treasury, allowing the government to buy equity in the firms, and putting them under a new regulator. President Bush is expected to sign the bill into law ASAP.
I’m as hopeful as anyone that the new law will help desperate homeowners escape foreclosure. Unfortunately, the bill doesn’t address what may have been the biggest cause of the subprime mortgage debacle. A recent article by MSN reporter Michael Brush titled “Why CEO pay fed the mortgage mess” explains it all: the Boards of Directors of too many major banks dangled huge pay incentives in front of their CEOs to achieve massive, short-term earnings growth. According to Brush, bank CEOs were paid millions of dollars to achieve high earnings targets based on loan production. The focus was on how many loans could be quickly generated, packaged and resold, not how risky those loans might be. You know what happened next: the subprime bubble burst and the world economy was thrown for a loop, but those well-paid CEOs who gambled on risky mortgage loans are still enjoying the fruits of their short-term successes.
Congress has never tried to legislate executive compensation, and with good reason; managing CEOs is the responsibility of corporate boards, not the federal government. But as long as Boards take a short-term focus and are willing to pay exorbitant sums for growth without any concern for sustainability, CEOs are going to be tempted to go for the quick buck and leave the future to fend for itself. When there’s too much money on the table, it’s the rare CEO who’ll forego a multi-million dollar bonus today in order to build a more stable company tomorrow.
We’re all suffering the consequences of the subprime mortgage mess and the shortsighted thinking that created it. Congress’ new bill may ease this particular crunch but, unless corporate Boards start taking a longer view when designing CEO compensation, the next financial crisis may be right around the corner.
To read Michael Brush’s article, go to http://articles.moneycentral.msn.com/Investing/CompanyFocus/FatCEOPayFedTheMortgageMess.aspx.
Topics: Business Ethics, Corporate Governance, Lauren Recommends, Risk Management, corporate responsibility |