Why is the Obama Administration Incentivizing Fraud?
In the run-up to the Global Financial Crisis, there was much talk of aligning the interests of the top management of these firms with that of shareholders. This could be consistent with the public purpose, although that is not at all guaranteed. (Before some readers object that the corporation’s only interest should be to maximize shareholder wealth, let me point out that from the beginning, the publicly-provided advantages of incorporation were supposed to be in return for demonstrated public benefits generated by the corporation.) This was part of the reason that top management and other employees were increasingly rewarded with stock options, supposedly linking their fate with that of the stockholders.
We now know beyond any doubt that the result was precisely the opposite: top management ran the biggest banks as control frauds, pumping up stocks through accounting fraud–to hide the fact that trades and other deals guaranteed longer term losses–as they used insider information to bet against their own firms. They sullied the reputation of their firms by pushing trashy assets onto their customers even as they bet on failure. They paid themselves outsized bonuses even as the share prices of their own firms crashed. They walked away from the carcasses of the firms they left behind, with golden parachutes to reward themselves for failure.
So while I am skeptical of a simplistic incentive argument, it does seem to fit reasonably well with the case of the transformation by top management of the biggest financial institutions into control frauds: all the incentives were “aligned” to allow the CEOs to loot them.
Check out the article in full here…