Vail Valley Voices: Banking’s time of reckoning
Vail, CO, Colorado
In the 1970s and ’80s, I ran a successful executive search firm specializing in banking and finance.
Those were heady times for bankers and for headhunters like me. During that period, the staid business of banking underwent a revolution toward a sales-driven model. New pay structures meant bankers began to be compensated like salesmen in other industries.
Since it was unseemly to create commission schemes, the banks turned to the euphemistic bonus, which in many instances exceeded base compensation substantially as the department the banker ran or worked in made money.
But unlike sales compensation, where adjustments are made to the pay of executives for returns or kickouts, bankers often avoided accountability by skipping from bank to bank before a credit could turn bad.
Even if a banker didn’t leave, he or she rarely went a year without any bonus at all.
With little accountability in the system and the threat of a competitive bank stealing another bank’s superstar, bonus compensation became a one-way street.
Bankers, and for that matter, ancillary professionals such as the lawyers who attended their closings, were held accountable only so long as they stayed with their employer and even then, not very often.
What’s happened today is not new in banking, and many warned of consequences 10 or even 20 years ago but were put off as naysayers.
Throughout hundreds of years, bankers have known their compensation, one way or the other, was dependent on the risks they took. And throughout the majority of the 20th century, banks were considered a cheap employer. That was because experience had taught them losses could be deferred well into the future with the threat of sudden ruin when those losses came home to roost.
Truth be told, not even a banker is happy when a colleague makes a big bonus and then skips out, leaving a ruined credit and a bank on the brink to deal with it.
The banks convinced themselves that competition demanded attracting the “best of the best” with competitive pay packages and demanding the development of competitive products.
Recent history is now littered with the remnants of these competitive institutions: Credit Lyonnais, Bear Stearns, Continental Bank of Chicago. The list goes on. One thing they all had in common was that they paid their rainmakers very well and held them to limited accountability.
Why is this of any interest today? The problems our banking industry and, by inference, our society now faces are largely the result not of excessive pay alone, although that element increases the cost of credit beyond what many prudently consider reasonable, but also of a lack of individual accountability.
The financial products that were engineered beginning in the mid-1980s created liquidity on an unprecedented scale and are largely responsible for the progress our society made in the last 20 years.
But like the machines in many a science fiction story that take over from their makers when the latter grow complacent, we have somehow gotten what we deserve.
None of this came about, of course, by accident. Individuals and ideologies on the conservative side of the economic and political spectrum fought hard and systematically for the elimination of regulations that virtually assured this inevitable result. After all, if our government will not hold institutions accountable, why should those institutions hold their individuals accountable?
You can draw your own conclusions from all this. But first you should begin to hold your elected representatives accountable for holding the government accountable for holding the institutions accountable.
Then, certainly and eventually, those institutions will hold their individual employees or partners accountable and, maybe, next time such a mess may be avoided. At least, until our society lulls itself back into that state of complacency from which messes like this one spring.
Observing recent congressional hearings bears out only that our lawmakers are out of practice on this one.
Gus Nicholson is a resident of Denver and Avon.