[Vnbiz] Vietnam SEC plans to ask government to pump in moneytosave the stock market

[Pham Thi Thanh An]

Dear CACC, 

 

I find the following recent article on the FT on state invervention to
rescue the current subprime mortgage crisis is particular relevant to our
thread of discussion on the stock market situation in Vietnam, so post it
here to share with you. 

 

As Martin Wolf, a fairly famous columnist of the FT argues here, even if
state rescue is seen as an undesirable encouragement of repeated mistakes,
failure to do so is often not a choice simply because of the
historically-proven unbearable consequences for the public! 

 

Yet, he also argues that doing more and better with market regulations, even
in this most difficult sector of money dealing is not impossible! 

 

Hope you enjoy the reading! 

 

Best, 

Thanh An

email: thanhan2505 at gmail.com

____ Why regulators should intervene in bankers' pay

By Martin Wolf 

Published: January 16 2008 02:00 

You really don't like bankers, do you?" The question, asked by a former
banker I met last week, set me back. "Not at all," I replied. "Some of my
best friends are bankers." While true, it was not the whole truth. I may
like many bankers, but I rather dislike banks. I recognise their necessity,
but fear their irresponsibility. Worse, they are irresponsible partly
because they know they are necessary.

My attitude to the banking industry is not a prejudice. It is a
"postjudice". My first experience with out-of-control banking was when I
watched the irresponsible lending that led to the devastating
developing-country debt crises of the 1980s.

The world has witnessed well over 100 significant banking crises over the
past three decades. The authorities have even had to rescue important parts
of the US financial system - on most counts, the world's most sophisticated
- four times during the same period: from the developing country debt and
"savings and loan" crises of the 1980s to the commercial property crisis of
the early 1990s and now the subprime and securitised-credit crisis of
2007-08.

No industry has a comparable talent for privatising gains and socialising
losses. Participants in no other industry get as self-righteously angry when
public officials - particularly, central bankers - fail to come at once to
their rescue when they get into (well-deserved) trouble.

Yet they are right to expect rescue. They know that as long as they make the
same mistakes together - as "sound bankers" do - the official sector must
ride to the rescue. Bankers are able to take the economy and so the voting
public hostage. Governments have no choice but to respond.

Nor is it all that difficult to understand the incentives at work. I gave
the broad answer in my column, "Why banking is an accident waiting to
happen" (Financial Times, November 27 2007).

It is the nature of limited liability businesses to create conflicts of
interest - between management and shareholders, between management and other
employees, between the business and customers and between the business and
regulators. Yet the conflicts of interest created by large financial
institutions are far harder to manage than in any other industry.

That is so for three fundamental reasons: first, these are virtually the
only businesses able to devastate entire economies; second, in no other
industry is uncertainty so pervasive; and, finally, in no other industry is
it as hard for outsiders to judge the quality of decision-making, at least
in the short run. This industry is, in consequence, exceptional in the
extent of both regulation and subsidisation. Yet this combination can hardly
be deemed a success. The present crisis in the world's most sophisticated
financial system demonstrates that.

I now fear that the combination of the fragility of the financial system
with the huge rewards it generates for insiders will destroy something even
more important - the political legitimacy of the market economy itself -
across the globe. So it is time to start thinking radical thoughts about how
to fix the problems.

Up to now the main official effort has been to combine support with
regulation: capital ratios, risk-management systems and so forth. I myself
argued for higher capital requirements. Yet there are obvious difficulties
with all these efforts: it is child's play for brilliant and motivated
insiders to game such regulation for their benefit.

So what are the alternatives? Many market liberals would prefer to leave the
financial sector to the rigours of the free market. Alas, the evidence of
history is clear: we, the public, are unable to live with the consequences.

An alternative suggestion is "narrow banking" combined with an unregulated
(and unprotected) financial system. Narrow banks would invest in government
securities, run the payment system and offer safe deposits to the public.
The drawback of this ostensibly attractive idea is obvious: what is
unregulated is likely to turn out to be dangerous, whereupon governments
would be dragged back into the mess.

No, the only way to deal with this challenge is to address the incentives
head on and, as Raghuram Rajan, former chief economist of the International
Monetary Fund, argued in a brilliant article last week ("Bankers' pay is
deeply flawed", FT, January 9 2008), the central conflict is between the
employees (above all, management) and everybody else. By paying huge bonuses
on the basis of short-term performance in a system in which negative bonuses
are impossible, banks create gigantic incentives to disguise risk-taking as
value-creation.

We would be better off with Jupiter's 12-year "year", since it takes about
that long to know how profitable strategies have been. The point is that a
year is an astronomical, not an economic, phenomenon (as it once was, when
harvests were decisive). So we must ensure that a substantial part of pay is
better aligned to the realities of the business: that is, is made in
restricted stock redeemable over a run of years (ideally, as many as 10).

Yet individual institutions cannot change their systems of remuneration on
their own, without losing talented staff to the competition. So regulators
may have to step in. The idea of such official intervention is horrible, but
the alternative of endlessly repeated crises is even worse.

The big points here are, first, we cannot pretend that the way the financial
system behaves is not a matter of public interest - just look at what is
happening in the US and UK today; and, second, if the problem is to be
fixed, incentives for decision-makers have to be better aligned with the
outcomes.

The further question is how far that regulatory net should stretch. I
believe it should cover all systemically important financial institutions.
Drawing the line will not be simple, but that is a problem with all
regulation. It is not insoluble. The question the authorities need to ask
themselves is simple: if a specific institution fell into substantial
difficulty would they have to intervene?

If the conflict of interest that dominates all others is between employees
and everybody else, then it must be fixed. All bonuses and a portion of
salary for top managers should be paid in restricted stock, redeemable in
instalments over, say, 10 years or, if regulators are feeling generous,
five. I understand that the bankers will not like this. Yet one thing is
surely now quite clear: just as war is too important to be left to generals,
banking is too important to be left to bankers, however much one may like
them.

 

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