Re: IBG YBG WBG

From: Mark Taranto
Affiliation:
Address: MarkTaranto@comcast.net
Date: 24 Jan 2007
Time: 09:14:15

Comments

I agree with everyone else -- good article. You mention that academics call this the Agency Problem (sometimes the Principal-Agent Problem) and that their solution is better corporate governance. There are actually two approaches that academics use to solve the problem. The second is to give the agent a contract that is aligned with the interests of the shareholders. This is exactly where investment Banks fail. They are too often rewarded for doing the wrong thing. You brought up the Joe Jett case. I've mentioned here, before, that there was something else going on at Kidder at the time. They had a huge inventory of MBS that were not hedged properly. When interest rates went up, their incentives told them to double down and leave the risky position unhedged rather than hedge. If rates went back down -- they make a profit and get a big bonus. If rates go up, the company loses more, but their income is unaffected. Rates went up. The other thing that happened at Kidder that I have never seen in the press is that the Fixed Income Compliance Officer was fired in January of 1994. This was months before the Jett scandal broke (in fact -- it was at the time that he was honored as GE's employee of the year). I don't remember them hiring a replacement before the firm fell apart. I often wonder what would have happened if she had stayed -- or if they brought in someone who really knew what he was doing.

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