Sunday, July 19, 2009

A Roadmap to Turn Around Problem Banks

The key to financial stability and reform at major banks is simple. The President, through his force of stature, could go to the nation’s most successful and conservative banks, such as Hudson City Bancorp (HCBK) and request that some of these banks’ executives and loan officers be placed in leadership positions at problem financial institutions. Of course, the incompetent executives they replace would have to be fired.

Most well run banks would naturally view losing talented executives as a raiding of their ranks, and rightly, as a penalty, rather than a reward, for their excellent performance. The government could issue to these well-run banks modest amounts of stock options in problem banks where their former executives have been placed as partial recompense for the loss of talented executives and the strengthening of competitors.

In addition, as Carl Icahn rightly points out, retention bonuses should only be paid to executives that a rational business enterprise would want to retain. This rules out the vast majority current of executives at many major financial institutions (let them find work elsewhere after they have destroyed their current employer!). However, few would object to paying performance-based bonuses to executives who have left healthy, thriving banks and insurers for those in need of their managerial expertise, as a public service to the country. The debate about compensation at financial institutions in which the government has a stake could then become rational.

Reckless managements must be replaced by those with a proven track record for performance. The current strategy of many incumbent CEOs is to engage in an arbitrage, whereby intelligent and conservative risk control is replaced by political lobbying aimed at keeping their jobs and getting access to government coffers when they fail in their fiduciary duties. This must stop. Getting the best managers to work for the worst banks and insurers is the key to real turnarounds and lasting financial stability.