Were bankers fools or knaves?

This is a long "Control C" for a blog post, but it's worth it.  Via Simon Johnson:

New evidence in favor of the second interpretation [knaves] has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton, who went carefully through the compensation structure of executives at the top 14 financial institutions in the United States from 2000 to 2008.

The key finding is that chief executives were “30 times more likely to be involved in a sell trade compared with an open-market buy trade” of their own bank’s stock and “the dollar value of sales of stock by bank C.E.O.’s of their own bank’s stock is about 100 times the dollar value of open market buys.” (See page 4 of the report.)

If the chief executives had really believed in what their banks were doing, they would have wanted to hold this stock – or even buy more.


Professors Bhagat and Bolton argue that if this incentive problem is important, we should see chief executives make a great deal of money while long-term buy-and-hold shareholders lose money.

Table 4 in their paper (Pages 45-48) shows the amounts of money involved, and they are simply staggering. Collectively, the people who headed these 14 institutions pocketed – in hard cash terms – more than $2.6 billion during 2000-8. It’s true that the paper value of their wealth dropped in 2008, although this was an unrealized paper loss. Even including that notional loss, the chief executives made an impressive $650 million profit [emphasis from TC].

In contrast, long-term shareholders in these 14 banks did very badly, particularly in 2008 (see Figure 1 on Page 61 of the paper). Professors Bhagat and Bolton show that shareholders in the biggest banks – where chief executives got their hands on more cash – did significantly worse than investors in smaller banks.

Interestingly, chief executives in the smallest banks in their sample did not sell much stock relative to their purchases of their own bank’s stock. The big bank-small bank contrast is quite striking.

British Prime Minister Harold Macmillan used to call them "banksters."


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