Column : Rebuilding the pillars

Font Size

Print

Feedback

Email

Discuss

• Discount UK Shopping

: Serious academic researchers are, generally speaking, averse to doing two things—comment upon a yet-unfolding event in a timely manner; and organise themselves into a large team to come up with research output that provides a comprehensive view of a phenomenon. That is why the recent volume on the financial crisis by the finance department of the New York University’s famed Stern School—Restoring Financial Stability—deserves special applause. A large and leading finance school and a short subway ride from Wall Street itself, Stern’s leadership in the matter is hardly surprising. But it is not alone. Wharton, for one, already has a course on the crisis and is likely to come up with an edited volume soon.

It is important to understand why an academic treatise on the subject should stand out amidst the reams that are being devoted worldwide to the subject. To quote from the foreword by the Stern deans “...we present here a set of views that are at once informed, carefully considered and debated, independent, and focused exclusively on public interest.”

While lucidly and accessibly propounded, the diagnosis of the Stern faculty does not throw too many surprises. Policy documents like the Turner Review discussed in this column recently have held pretty much the same factors responsible—global imbalance, overly soft interest rate regimes by central banks led by the Fed, financial innovation gone astray through securitisation and massively leveraged near-banks. It adds governance failure at major financial institutions—cash bonuses egging financial executives on to take massive risks—and explicit or implicit government guarantees to the list of culprits.

The prescription for a new architecture is perhaps of greater interest. The volume identifies four principles that should guide the new system. Presciently, it starts off with fixing executive pay rather than with any specific asset market problems. Greater disclosure and transparency of compensation; longer stock holding periods and stricter forfeiture rules; and a multi-year bonus pool linked to firm performance in both directions, from which cash out can happen only in a staggered manner. It is important to remember, institutions do not make risky or dumb decisions, their executives do. To make institutions behave, curb greed at the executive level.