Homeowner's Blog

How to Fix the Financial System

Congress is considering financial-system-overhaul legislation. Right now there are no laws in to prevent another financial meltdown. It's clear that major reform is necessary. The problems are complex, and there are many complicated proposals out there. Sometimes someone comes up with a fairly simple solution to a complicated problem.  One of them came from the famous investor and "Oracle of Omaha" Warren Buffet. His recent suggestion: "In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control," Buffett wrote. "If he's incapable of handling that job, he should look for other employment. And if he fails at it -- with the government thereupon required to step in with funds or guarantees -- the financial consequences for him and his board should be severe."

Buffet's concept can be formalized in federal legislation by requiring that the CEO and any other senior staff or board members who had been active proponents of the company's irresponsible policies be asked to seek new career opportunities elsewhere as a precondition for future federal bailouts of companies that substantially contributed to the financial crisis. This policy should provide for an orderly executive transition, and it should not apply to any employees or board members who weren't involved in the decision making process regarding these policies, or who only provided staff support. In most of the offending companies, you would be talking about only a small handful of employees, and in the last crisis probably only in the low hundreds.

Creating a career hazard for those who created the current moral hazard in the financial services sector would discourage their successors and potential imitators from such  choices in the future.

A New World Financial Order

The world's foremost annual international gathering of government and financial services leaders finished a five-day meeting in Switzerland on January 30. There was almost universal agreement among world political leaders attending the World Economic Forum that the root cause of a near global economic crash was irresponsible risk taking by bankers all over the world. French President Nicolas Sarkozy summed up the sentiments of both government leaders and voters world-wide in calling for a return to ethics and morality in the financial services sector. Some bankers in attendance agreed. "The banks who stayed strong are angry at the banks who had poor management," said Robert Diamond, President of Barclays, a large British bank.

Just as happened in the last 100 international financial crises, financial services firms have managed to socialize the losses by passing them on to taxpayers while retaining their profits, according to the World Bank. This moral hazard must be stopped through unified international regulation, and financial services sector leaders must relearn that the purpose for their sectors' existence is to efficiently provide credit for the real world. In our increasingly integrated world economy. New regulations that will force senior financial services executives who caused the problem to recognize their fiduciary responsibility to their stockholders and moral and ethical responsibility to society should be coordinated internationally to provide consistency.