How We Can Fix Wall Street

During last fall’s financial Armageddon, many of Wall Street’s biggest banks faced a stark choice: Either take government money to stay alive, or go bankrupt. The survival instinct won out, and after taking government money, some -- including Goldman Sachs (NYSE: GS  ) and JPMorgan (NYSE: JPM  ) -- have paid it back.

But Bank of America (NYSE: BAC  ) , AIG (NYSE: AIG  ) , Citigroup (NYSE: C  ) , General Motors, GMAC, Chrysler, and Chrysler Financial still retain those funds, and they’re paying the price -- literally. These seven are subject to the whims of the government’s “pay czar” until they pay back their government money.

Do recent developments like the “pay czar” usher in a new era for executive compensation, where restrictions are placed on bonuses paid as a way of reining in incentives that led to an era of corporate excess and reckless risk-taking? Should the country’s executive compensation system be restructured as part of an overhaul of corporate governance? For that matter, what changes should be made to corporate governance as a whole?

Congressman Paul Kanjorski (D.-Pa.), chairman of the House Financial Services subcommittee on capital markets, gave his thoughts on reforming corporate governance during a recent interview. What follows is an edited transcript.

Jennifer Schonberger: Part of the reason Wall Street levered up and took on so much risk was that it produced such great returns in the short term -- i.e., quarterly results, which in turn translate to windfall bonuses. In that vein, we talk about rectifying the system, restructuring it and trying to put a lid on risk. How much of that is rooted in pay structure/executive compensation? Can we rewire the system to make it more long-term focused?

Rep. Paul Kanjorski: That can be done rather easily, but we shouldn’t do it as simplistically, because the government should not get inside the interest of a corporation -- what they pay their workers. That’s a private entity. We should get concerned and exercise regulation because it has impact on the economy or the financial stability of the nation. We shouldn’t be spending our taxpayer money and getting heavily involved in setting wages.

Now we’ve done that just recently. Our problem is, we need serious reform in corporate governance, and if you do that, you’ll arm the shareholders and the appropriate parties with sufficient powers to make sure the insiders don’t get away with dictatorially running corporations and the assets of corporations. We just haven’t attended to that. Next year, that should be our big measure before this committee -- really in a serious way examining corporate governance and what additional powers are necessary.

Schonberger: Corporate governance has really fallen off the radar for a lot of investors. How do we get investors to care about this critical issue?

Kanjorski: The problem is that we’ve moved away from private investors and private ownership of capital being important as individuals. It’s become funded investors -- pension funds, large institutions, unions. So there’s not a single human mind that’s watching out for it. It’s a collective.

If we realize that, we give the opportunity for those collectives to have influence. If we make the right adjustment on corporate governance entities like CalPERS, they will be able to represent their pensioners in a much better way, because we’ll be able to give them the tools to be able to do that.

Right now, they’re very frustrated. Proxies are sent out, boards are elected, no one can nominate. We have to bring that up to speed. We have to adjust it to meet the new challenges of the global market.

Schonberger: I recently spoke with Yale professor Robert Shiller, and he told me that he thinks it’s time for a national consideration on restraining any further increases in economic inequality. He said that ideally, if it were politically possible, we should put it high on our agenda to start thinking about how we’re going to prevent it from getting really bad. What is your take on this?

Kanjorski: We do have tools that should be used, and we’re not using them. The tax code, if properly graduated, takes care of that problem. We’ve allowed the extremely wealthy to embarrass the political class in this country to drive down the burden that they should properly carry in taxes.

So as an example, [Berkshire Hathaway’s (NYSE: BRK-A  ) ] Warren Buffett makes the perfect argument: Why should he pay 15% and you pay 25%? We should attend to that. That’s wrong. If we graduate taxes properly, these companies either won’t [be able to] afford [to,] or they’ll be throwing money away to overpay their executives.

But the reality is, if you touch that with corporate governance reform -- shareholders don’t want to throw their money away. The only reason is, they don’t know how to fight it. Secondly, it’s so expensive to make a fight now. We need to open that up and allow fresh air into the corporate structure to protect them. Corporations need Landrum-Griffith legislation that we put in place for the labor unions when they were becoming undemocratic and sealed from the inside. We passed a law that said, unions have to afford democratic processes to their members, and we gave the principles that spelled out [that] law. We need to do the same thing with corporations. You have to give democratic processes to your shareholders.

You can read the other half of my interview with Rep. Kanjorski here.

More on corporate governance:

Fool contributor Jennifer Schonberger owns shares of Bank of America, but does not own shares of any of the other companies mentioned in this article. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2009, at 11:59 AM, madmilker wrote:

    1000 board feet of lumber

    1 nail

    1 hammer

    574,000 cubic yards of concrete

    and one small sign tat reads... "Made In America"

  • Report this Comment On November 27, 2009, at 1:36 PM, vriguy wrote:

    What we need is pass-through shareholder voting. What I'd like to see is everyone that holds a mutual fund, being able to choose one entity that can vote his or her shares on executive compensation. Groups like, say, Consumers Union or the Motley Fool, could enunciate their policy on executive pay and I could decide which group's policy I prefer when I first buy fund shares - In effect, I'd be giving TMF or CU my proxy vote. In practice there would likely be only a few investment/consumer groups - each reflecting a particular philosophy on executive pay.

  • Report this Comment On November 27, 2009, at 11:19 PM, amitgaglani wrote:

    Guys, Goldman Sucks. Goldman has been so arrogant since it almost collapsed in Sept 2008. Goldman was in a coma and hank Paulson & company saved goldman through various means. There was nobody left in Sept 2008 so failure of AIG would have been almost end of Goldman. Goldman had hedged AIG’s CDS with what financial institutions ? there was no body left in the wall street. all Europeaon banks were paid by AIG and all american banks were gone except chase and goldman sucks. Can Goldman explain how could they make so much profits in last 12 months ? because they have no competition in wall street. AIG crisis was brought by Goldman. They asked for the collateral from AIG which brought AIG’s credit rating downgraded and AIG had liquidity crisis. Goldman wants to monopolize the wall street and people like Hank paulson, Geithner are there to approve anything goldman does which is not good for american people. in 2007, we have seen Goldman has already jacked oil prices by buying oil futures. Goldman’s profit is derived by trading in commodities and currencies. Who knows even dollar’s demise is planned by Goldman for their bumper profits. At goldman, profit comes first country second. Goldman should come clear on this. How is it making bumper profits ? speculating in ommodities so that common people pay more for oil and other commodities. Trading against dollar so more jobs are outsourced and americans cant pay their bills. Goldman is not contributing to american people’s welfare. trading in derivatives does not make life easy for common people. Govt is full of ex-goldman so poor obama can not stop goldman. Goldman should lend to all those small business so that jobs come back and also reduce all mortgages by half for common people. Banks have already made bumper profits by charging customers high interest. property prices were already double by the time CDOs and CDS fraud happened. Goldman is making millions at the expense of american people. Goldman Sucks.

    Guys, Goldman sucks but who can stop them ? govt is full of ex-goldman and non goldman can not understand what is going on ? Only goldman knows what is going on at present. Taking $10 billion from govt and receiving $12 billion from AIG was not only favours goldman received last year. becoming bank holding company at will, at his own convienience also benefits goldman. Also goldman’s activities since Sept 2008 have not been scrutinized by any independent authority. How goldman could make billions when american people were struggling without jobs and no income and did not spend on anything which could benefit economy. this simply means goldman made money by trading agasint commodities and currencies. even their income statement for last 12 months says they made money by betting against commodities and currencies. What is the reason for dollar’s decline ? WHO HAS MONEY TO INFLUENCE DOLLAR’S DECLINE ? it will be interesting to sceutinize goldman’s reaserch reports about dollar’s future for next 12 months. In 2007, Goldman predicted oil will spike from 60 to 105 and infact oil went upto 150. The common people paid 3 to 4 dollars for gas because of goldman. NY Attorney should pay more attention to Goldman’s activities

  • Report this Comment On November 27, 2009, at 11:21 PM, amitgaglani wrote:

    Guys, Goldman Sucks. Goldman has been so arrogant since it almost collapsed in Sept 2008. Goldman was in a coma and hank Paulson & company saved goldman through various means. There was nobody left in Sept 2008 so failure of AIG would have been almost end of Goldman. Goldman had hedged AIG’s CDS with what financial institutions ? there was no body left in the wall street. all Europeaon banks were paid by AIG and all american banks were gone except chase and goldman sucks. Can Goldman explain how could they make so much profits in last 12 months ? because they have no competition in wall street. AIG crisis was brought by Goldman. They asked for the collateral from AIG which brought AIG’s credit rating downgraded and AIG had liquidity crisis. Goldman wants to monopolize the wall street and people like Hank paulson, Geithner are there to approve anything goldman does which is not good for american people. in 2007, we have seen Goldman has already jacked oil prices by buying oil futures. Goldman’s profit is derived by trading in commodities and currencies. Who knows even dollar’s demise is planned by Goldman for their bumper profits. At goldman, profit comes first country second. Goldman should come clear on this. How is it making bumper profits ? speculating in ommodities so that common people pay more for oil and other commodities. Trading against dollar so more jobs are outsourced and americans cant pay their bills. Goldman is not contributing to american people’s welfare. trading in derivatives does not make life easy for common people. Govt is full of ex-goldman so poor obama can not stop goldman. Goldman should lend to all those small business so that jobs come back and also reduce all mortgages by half for common people. Banks have already made bumper profits by charging customers high interest. property prices were already double by the time CDOs and CDS fraud happened. Goldman is making millions at the expense of american people. Goldman Sucks.

    — anish shah

    6. November 27, 2009

    10:46 pm

    Link

    Your comment is awaiting moderation.

    Guys, Goldman sucks but who can stop them ? govt is full of ex-goldman and non goldman can not understand what is going on ? Only goldman knows what is going on at present. Taking $10 billion from govt and receiving $12 billion from AIG was not only favours goldman received last year. becoming bank holding company at will, at his own convienience also benefits goldman. Also goldman’s activities since Sept 2008 have not been scrutinized by any independent authority. How goldman could make billions when american people were struggling without jobs and no income and did not spend on anything which could benefit economy. this simply means goldman made money by trading agasint commodities and currencies. even their income statement for last 12 months says they made money by betting against commodities and currencies. What is the reason for dollar’s decline ? WHO HAS MONEY TO INFLUENCE DOLLAR’S DECLINE ? it will be interesting to sceutinize goldman’s reaserch reports about dollar’s future for next 12 months. In 2007, Goldman predicted oil will spike from 60 to 105 and infact oil went upto 150. The common people paid 3 to 4 dollars for gas because of goldman. NY Attorney should pay more attention to Goldman’s activities

  • Report this Comment On November 27, 2009, at 11:27 PM, amitgaglani wrote:

    goldman sucks.

  • Report this Comment On November 27, 2009, at 11:27 PM, amitgaglani wrote:

    goldman sachs or sucks ?

  • Report this Comment On November 27, 2009, at 11:28 PM, amitgaglani wrote:

    goldman sucks. ban goldman from trading.

  • Report this Comment On November 29, 2009, at 2:11 AM, NotAnotherTrader wrote:

    I'm all for the "pay czar". I don't want my (reluctanctly paid) taxes to go as a multi-million bonus for an unethical CEO who doesn't really care for the future of a company, since being a CEO is just basically "another job". Why do you think Microsoft and Berkshire are such financial giants? Because Gates and Buffett have a personal stake in the company, so they fight with teeth and nails.

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