Sunday, March 22, 2009

Financial Princes Have no Clothes

We should all slap our thighs and roar at the calls to keep the hyper-talented and super-knowledgeable financial pros in place. These princes are not only without clothing, but they also are deformed and missing essential parts.

The financial plays, both big and small, have long been in a black box to nearly all of us...and we have been fine with that. Perhaps a better analogy is a camera obscura, where the image of reality comes though a pinhole and we can sort of make out the reflection of reality.

The truth is, hardly any of us know enough and have the time to devote to making larger financial decisions. Rather, our minds want and our hearts need to trust that:
  1. Those making the calls affecting our savings, or disposal income, and the financial health of our employing companies are brilliant and highly competent
  2. Surely our financial well-being is far better trusted to them than free options, such as indexing to the Dow.
This is akin to needing to have absolute faith in the brain surgeon before the anesthesia mask covers our nose and mouth. We must trust the pro to do the right thing, perfectly.

Alas, we suddenly have become an untrusting nation. Virtually all of us with savings and retirement accounts know those moneys have plunged 30% or 50% or more in value.

We focus on AIG giving bonuses to the boobs who managed us into economic failure. Yet we don't seem willing to see the professional nudity and ugliness of the money managers. It's time, or past that time.

Over at this weekend's Financial Times, Christopher Caldwell has a relatively dispassionate take on the mob mentality of us disgruntled types. While he concentrated on the illogic of crushing the overpaid managers, he also writes, "The case for huge executive salaries in the financial sector has crumbled with the financial system."

Just so.

Yet, our deep emotional need to believe that financial magi exist in large enough numbers to run the show again remains. So, we buy into the absurd fantasy that we need to praise our naked princes and never say the obvious about their failings. That would be like letting the orderly perform our brain surgery.

Instead, we accept what the big investment banks and other financial houses claim. They tell us we need to be very afraid that if they don't pay huge salaries and huger bonuses, these sorcerers will fly away, leaving us impotent and poor.

Of course, this is similar to sports corporations, particularly baseball teams, paying juiced old boys in tights tens of millions a year to maybe be good enough to please the fans with playoff victories. That's ticket inflation and worse for fans. Plus many of those investments return poorly or fail completely.

So it is in the financial world. There are a scant few real stars who do out perform others, most years at least. Yet, the vast majority of the money princes do not. They blunder, their (and our) portfolios founder, and they are too dull witted to avoid the worst plunges.

I am much less afraid that these long-term over-rewarded princes take their alleged brilliance away than that they remain. The financial houses wail that their knowledge could walk if they do not continue to receive their tribute. Yet in reality, they are playing the same game at much higher stakes in pretending that if only we leave our present and future in the hands of these magi, all will be well and we shall return to a never-ending growth spiral.

Far better would be some candor here. The houses and their princes are primary proponents of free markets and the power of capitalism. Then let them live it.

The obscene bonus structures are built on short-term profits and far too easily achieved (and often meaningless for the customers) milestones. Instead, let the high rollers have to add real value to their portfolios, measured both in obvious profits and in sustainable value added.

Those are harder to measure, but they are far more meaningful to the shareholders and investors. Using such metrics would mean the end to the tens and hundreds of millions of dollars of salary/bonus/options packages too many of these pros have known for too long.

Make them prove they can rebuild the value they lost through their inattention and dumbness. Let them fix their houses' troubles before claiming the bonuses. Make them earn their millions by producing, not just by breathing.

If those of us who still have jobs were as lame at what we do as these princes have been, we'd have been on the street long ago...with no reference letters. Moreover, their failures affect far too many. We should not fear letting the knowledge of the proven incompetents go away. It did not serve them or us well.

That utopia should vanish into history. Our financial princes are naked and hideous in the main. We need to reward those who actually are brilliant and competent and not the bunglers.

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