4 ms·

Mark Shuttleworth: It’s a solvency problem, not a liquidity problem

41 points by ash 18y ago

olefoo 18y ago
I like his idea of a 7-year waiting period on executive bonuses. Anything that gets us out of the quarter to quarter short-term mind set would be an improvement.
- Tichy 18y ago
  I don't understand that kind of thing. Shouldn't a company be allowed to be whomever they want however much they want? If not, why not? I know about the incentives for risk taking, but what would be the point of creating a law about it? If banks figure out that a particular "bonus construct" is harmful in the long run, they can change it by themselves.
  - michael_dorfman 18y ago
    The problem is that it is not necessarily harmful to them, but harmful to others (and encourages behavior to that effect.)
    - Tichy 18y ago
      Because they only care about short term wins? But wouldn't that still damage the companies who employ them? And should it be illegal to seek short term wins?
      - iuguy 18y ago
        The market would find a way around it. Also bear in mind that a corporation's only purpose is to make money for its shareholders. By eliminating short term wins you're interfering with that area.
        Tichy 18y ago
        I don't think it should be illegal to seek short term wins. Unless perhaps they qualify as gambling, but even then I am not sure that gambling should be illegal (really don't know).
        michael_dorfman 18y ago
        How about gambling with other people's money?
        Tichy 18y ago
        How can you get away with gambling with other people's money? I think fraud should be illegal, that is telling people that their investments are 100% secure, when they are not, should be illegal. Other than that, if people invest into a risky company, it is them who are gambling.
        joshwa 18y ago
        http://en.wikipedia.org/wiki/Information_asymmetry http://en.wikipedia.org/wiki/Information_asymmetry
    - anamax 18y ago
      > The problem is that it is not necessarily harmful to them, but harmful to others (and encourages behavior to that effect.) It's only harmful to others who decide to make the same mistake. It's useful to (different) others who observe and conclude "wow, that's dumb in 3D". Someone else doing something different is a free (to you) learning opportunity. If it works, you can copy. If it doesn't work, you can avoid. There are CEOs who are worth $240M/year in specific circumstances. Laws are unlikely to make the right call but the market will, rewarding folks who get it right and punishing those who get it wrong. What can be better than that?
      - michael_dorfman 18y ago
        But do those who do it wrong get punished, or do they get to keep the $240M? I've seen a lot of incompetent CEOs walk away with substantial golden parachutes, while employees harmed by their actions got nothing but two week's noticw...
  - davidw 18y ago
    Well, he says that the government shouldn't be setting these sorts of conditions, but that one way or another (shareholder pressure, hopefully), something like this ought to happen, to provide better incentives for management to take a long-term look at things, rather than just trying to jack up profits in the short term.
  - sethg 18y ago
    I have mixed feelings about this issue. On the one hand, I generally feel that if a company's board of directors wants to shoot the company in the foot, then the shareholders, not the government, have the duty to wrestle away the gun. On the other hand, there's a real principal-agent problem here--there are so many layers between the shareholders and the compensation committee, and so many perverse incentives, that it's easy for the directors to make decisions that are not in the shareholders' best interest.
- patrickg-zill 18y ago
  The underlying issue is the lack of shareholder-oriented corporate governance. The executive bonuses are one of the symptoms of that. Alcoa has 107K employees and is considered well-run, the CEO gets about $8M per year. Verizon, a huge 228K employee company - the CEO gets under $6M per year. Compare this to Nardelli at Home Depot - under his watch they screwed up and allowed Lowe's to come in and take over a big profitable chunk of the market, among other mis-steps. Nardelli walked away with some $240 million in compensation along with a huge severance package.
swombat 18y ago
Interesting read, but where does he support the assertion that it's a solvency rather than a liquidity problem. That may be true, as a number of assets (particularly mortgage-backed) have dropped in price dramatically, thus potentially making some banks which relied on them insolvent, but it may only be so in the short term, as the price for those securities is unrealistically low at the moment. In any case, I'm always one for supporting the point that I make in the title, somewhere in the article.
- ajross 18y ago
  Yes, but those assets are held by banks, who would otherwise be lending that money back out into the economy. Even a modest drop in total loan values across a very broad market (in this case, the US real estate market) means that a huge amount of money just isn't there any more. So you can't borrow it to fund your startup, or business expansion, etc...
tdavis 18y ago
TL;DR: Econmeez fuct. Next topic, please.
albertcardona 18y ago
If the USA is entering a recession, how come the dollar is now recovering relative to the euro? Can anybody explain it? http://finance.yahoo.com/currency/convert?amt=1&from=EUR&to=USD&submit=Convert http://finance.yahoo.com/currency/convert?amt=1&from=EUR...
- pmorici 18y ago
  Because Europe is entering a recession too. Given that both are sinking boats it is probably just equalizing from the previous run to the euro in the previous months when this looked like it might be a USA only thing.
  - albertcardona 18y ago
    Thanks. So is there any currency that is going up relative to both euro and dollar? Just curious.
    - sjh 18y ago
      The yen: http://finance.google.com/finance?q=JPYUSD http://finance.google.com/finance?q=JPYUSD, http://finance.google.com/finance?q=JPYEUR http://finance.google.com/finance?q=JPYEUR
    - josefresco 18y ago
      I think the Swiss franc was up a bit too. But don't get your financial advice from Hacker News.
      - albertcardona 18y ago
        I live in Switzerland. The CHF went down relative to the dollar over the last two weeks. And no, HN is not my source of financial advice. Actually, I do not have any source for that.
    - deleted 18y ago
      [deleted]
    - 18y ago

41 points by ash 18y ago

I like his idea of a 7-year waiting period on executive bonuses. Anything that gets us out of the quarter to quarter short-term mind set would be an improvement.

Tichy 18y ago
I don't understand that kind of thing. Shouldn't a company be allowed to be whomever they want however much they want? If not, why not? I know about the incentives for risk taking, but what would be the point of creating a law about it? If banks figure out that a particular "bonus construct" is harmful in the long run, they can change it by themselves.
- michael_dorfman 18y ago
  The problem is that it is not necessarily harmful to them, but harmful to others (and encourages behavior to that effect.)
  - Tichy 18y ago
    Because they only care about short term wins? But wouldn't that still damage the companies who employ them? And should it be illegal to seek short term wins?
    - iuguy 18y ago
      The market would find a way around it. Also bear in mind that a corporation's only purpose is to make money for its shareholders. By eliminating short term wins you're interfering with that area.
      - Tichy 18y ago
        I don't think it should be illegal to seek short term wins. Unless perhaps they qualify as gambling, but even then I am not sure that gambling should be illegal (really don't know).
        michael_dorfman 18y ago
        How about gambling with other people's money?
        Tichy 18y ago
        How can you get away with gambling with other people's money? I think fraud should be illegal, that is telling people that their investments are 100% secure, when they are not, should be illegal. Other than that, if people invest into a risky company, it is them who are gambling.
        joshwa 18y ago
        http://en.wikipedia.org/wiki/Information_asymmetry http://en.wikipedia.org/wiki/Information_asymmetry
  - anamax 18y ago
    > The problem is that it is not necessarily harmful to them, but harmful to others (and encourages behavior to that effect.) It's only harmful to others who decide to make the same mistake. It's useful to (different) others who observe and conclude "wow, that's dumb in 3D". Someone else doing something different is a free (to you) learning opportunity. If it works, you can copy. If it doesn't work, you can avoid. There are CEOs who are worth $240M/year in specific circumstances. Laws are unlikely to make the right call but the market will, rewarding folks who get it right and punishing those who get it wrong. What can be better than that?
    - michael_dorfman 18y ago
      But do those who do it wrong get punished, or do they get to keep the $240M? I've seen a lot of incompetent CEOs walk away with substantial golden parachutes, while employees harmed by their actions got nothing but two week's noticw...
- davidw 18y ago
  Well, he says that the government shouldn't be setting these sorts of conditions, but that one way or another (shareholder pressure, hopefully), something like this ought to happen, to provide better incentives for management to take a long-term look at things, rather than just trying to jack up profits in the short term.
- sethg 18y ago
  I have mixed feelings about this issue. On the one hand, I generally feel that if a company's board of directors wants to shoot the company in the foot, then the shareholders, not the government, have the duty to wrestle away the gun. On the other hand, there's a real principal-agent problem here--there are so many layers between the shareholders and the compensation committee, and so many perverse incentives, that it's easy for the directors to make decisions that are not in the shareholders' best interest.
patrickg-zill 18y ago
The underlying issue is the lack of shareholder-oriented corporate governance. The executive bonuses are one of the symptoms of that. Alcoa has 107K employees and is considered well-run, the CEO gets about $8M per year. Verizon, a huge 228K employee company - the CEO gets under $6M per year. Compare this to Nardelli at Home Depot - under his watch they screwed up and allowed Lowe's to come in and take over a big profitable chunk of the market, among other mis-steps. Nardelli walked away with some $240 million in compensation along with a huge severance package.

swombat 18y ago

Interesting read, but where does he support the assertion that it's a solvency rather than a liquidity problem. That may be true, as a number of assets (particularly mortgage-backed) have dropped in price dramatically, thus potentially making some banks which relied on them insolvent, but it may only be so in the short term, as the price for those securities is unrealistically low at the moment. In any case, I'm always one for supporting the point that I make in the title, somewhere in the article.

ajross 18y ago
Yes, but those assets are held by banks, who would otherwise be lending that money back out into the economy. Even a modest drop in total loan values across a very broad market (in this case, the US real estate market) means that a huge amount of money just isn't there any more. So you can't borrow it to fund your startup, or business expansion, etc...

tdavis 18y ago

TL;DR: Econmeez fuct. Next topic, please.

albertcardona 18y ago

If the USA is entering a recession, how come the dollar is now recovering relative to the euro? Can anybody explain it? http://finance.yahoo.com/currency/convert?amt=1&from=EUR&to=USD&submit=Convert http://finance.yahoo.com/currency/convert?amt=1&from=EUR...

pmorici 18y ago
Because Europe is entering a recession too. Given that both are sinking boats it is probably just equalizing from the previous run to the euro in the previous months when this looked like it might be a USA only thing.
- albertcardona 18y ago
  Thanks. So is there any currency that is going up relative to both euro and dollar? Just curious.
  - sjh 18y ago
    The yen: http://finance.google.com/finance?q=JPYUSD http://finance.google.com/finance?q=JPYUSD, http://finance.google.com/finance?q=JPYEUR http://finance.google.com/finance?q=JPYEUR
  - josefresco 18y ago
    I think the Swiss franc was up a bit too. But don't get your financial advice from Hacker News.
    - albertcardona 18y ago
      I live in Switzerland. The CHF went down relative to the dollar over the last two weeks. And no, HN is not my source of financial advice. Actually, I do not have any source for that.
  - deleted 18y ago
    [deleted]
  - 18y ago