Originally published at: http://boingboing.net/2016/10/15/the-pathogens-of-wells-fargo.html
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Until ‘shareholder value’ goes away these kinds of games are not going to go away.
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2,000,000 financial crimes.
Not to worry Banksters, nobody is going to jail, yet.
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I worked at smaller banks, where even though we had quarterly training on federal banking laws, because the employee metrics were really only tracking new accounts there was a “wink wink” attitude toward new accounts. Our jobs, bonuses, and promotions were based on opening as many new accounts as possible, not the amount of business overall. Even the customer promotions would encourage customers to close accounts and get new ones.
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Shareholder value isn’t a bad thing. The problem is using it as the only measure of success. Trying to balance many kinds of good is complicated, and people love simple solutions.
Also, I’m not sure I buy the premise of the article. Valuing stock options isn’t terribly complicated, and prices are printed in the newspaper. It’s hard to fake that. It’s true they’re much more volatile than the underlying stock; that’s the whole point.
If the company gives you a million dollars in stock options as a bonus two things can happen. If the share price goes down just a little, your million can become zero. If the price rises a little, your million can very easily become ten million. But your options didn’t have two different prices; the price changed.
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Black Shoales produces accurate estimates of value as much as the input estimates including volatility are correct. As far as I can tell this article seems to think the estimates of volatility are lower than actual volatility. But that is not an issue with the model just a user error.
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The model does have a few problems marrying reality.
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In what way is this behavior not like the Mafia eating a company from within? And isn’t that illegal?
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The trouble as I get older is the more I realize that all the companies that I think are doing things “right” (long-term thinking, ignoring quarterly results, emphasizing quality, etc.) have either gone out of business or been bought by the companies that abjure the practices that I think should have long term payoffs.
It’s been rather disheartening, but over the decades, I’m beginning to suspect that if my company took my advice, I’d drive it into the ground.
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The problem is that the people being paid in options generally have the ability to cause brief spikes in the price that undermine the long term health of the company.
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Good question. Matt Taibbi noted the same thing during the 2012 election when talking about the company that Romney used to work for.
But it sure also does happen from the inside. If you can even call it the inside. C Level folks move around and have no connection to their companies anymore. Where are the Bill Hewlett or David Packard types of the world of big corporations?
In 2003, I was hired to work for a medical device company that was still being run by the guy that started it. It was owned by a larger one, but we operated at the time as a subsidiary. That changed radically soon after I joined. We were fully absorbed by the larger one. One that had very little knowledge about the dynamic world of technology, medical devices or FDA regulations. We were extremely profitable and they squeezed us HARD. Same with other device companies they bought. When they had enough, they spun off us all off. Lots of people were laid off, including me.
I came back as a contractor later to the spun off company and was hired on again. Then the old guys from the old days that stayed to run the new company retired - they were really not making that much money compared to what came next.
The new guy was brought in from a competitor and he immediately saw a chance to squeeze the place and make it look attractive to buyers. Layoffs, outsourcing, etc… We were always very profitable.
The first full year that he was there, he made more money in total compensation than the CEO of Chase and Amex.
I saw the writing on the wall and bailed out, but soon later they were in fact sold to a very large company based in Jersey.
The squeezing began again. And the layoffs, and the outsourcing.
I have friends there still. Deja vu all over again - the buyer is clueless on regulations, medical devices and cutting edge technology.
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I didn’t realize til I read this article how tired I’ve grown of the word “rigged.” Not saying it’s inaccurate… just another word Trump has ruined for me.
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As long as the gains continue to outweigh the penalties for committing fraud and other banking crimes, this will keep happening. It really is that simple.
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