Tom Cooley: April 2010 Archives

The Riskiest Financial Firms In America

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by Thomas Cooley

New measurements identify the institutions that pose the greatest risk.

We are now well past the worst throes of the financial crisis. Banks and financial institutions are earning record profits. The economy is recovering steadily. All is right with the world! Wishful thinking. The uproar over the fraud charges against Goldman Sachs last week should have underscored that we still haven't addressed the underlying sources of the risk that caused our financial collapse in 2007-2009.

In the wake of the charges the value of Goldman's stock plummeted and brought the shares of other banks down with it. It was an ominous sign that the markets realize there is still plenty of systemic risk in our banking system.

A group of my colleagues at the NYU Stern School of Business have been working since the beginning of the crisis to figure out how we can measure the risk that firms pose for the financial system as a whole. There are two parts to the risk that firms carry: 1) the risk they impose for their own shareholders because of the strategies they use to earn profits; and 2) the risk they create that spills over to the system as a whole if they get into trouble. We now have measures of that risk. The measures are updated weekly and viewable online.

Read the full opinion editorial at Forbes.com.

Financial Reform's 'Public Option'

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by Thomas Cooley

How President Obama's consumer-protection plan threatens his plan to rein in Wall Street excess.

In the early proposals from the Senate Banking Committee, the creation of an independent Consumer Financial Protection Agency (CFPA) was a centerpiece of the proposed Restoring American Financial Stability Act.  The CFPA has drawn such fierce opposition that it is threatening to become like the public option was for health-care reform, a lightening rod for competing views about the proper role of government and a distraction to practical law-making. The media attention and financial-market reaction to the accusations that Goldman Sachs deceived investors about the nature of the synthetic collateralized debt obligations (CDOs) make one thing very clear: we need more transparency in financial markets. We have to get financial reform right so we mitigate the risk of future meltdowns of the system. The outrage over this case seemingly strengthens the hand of the Obama administration in getting the legislation it wants. In his speech to Wall Street on Thursday, President Obama stated, "It is essential that we learn the lessons of this crisis so we don't doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass--an outcome that is unacceptable to me and to the American people." Fair enough. But it is surprising that they have courted failure by lumping regulatory reform together with consumer protection.

Read the full opinion editorial at Newsweek.com.
by Thomas F. Cooley

The Dodd bill makes some important improvements to corporate governance.

Since the onset of the financial crisis there has been a huge hue and cry about executive compensation, particularly compensation on Wall Street. It isn't hard to understand why, and it would not have been unexpected to see financial reform legislation that took a heavy-handed approach to "reforming" compensation practices. Early on in the crisis there were proposals to impose an 80% tax on bonuses and proposals to cap compensation in absolute terms. Last week members of the Angelides commission, charged with investigating the causes of the financial crisis, pummeled former Citi executives Charles Prince and Robert Rubin for getting generous compensation while the firm essentially collapsed around them.

We saw much of the same reaction in the 1930s. There was a huge public outcry over the compensation of Eugene Grace, the president of Bethlehem Steel ( BHMMQ.OB - news - people ), when it was revealed that he received a base salary of $12,000 and a bonus of more than $1.6 million in 1929. That amounts to $150,000 salary in 2010 dollars with a nearly $20 million bonus.

In spite of periodic expressions of outrage, efforts to "reign in" executive compensation have so far been relatively muted. The major pending legislation--Sen. Dodd's "Restoring American Financial Stability Act of 2009"--makes some very cautious but important recommendations about compensation. There are four that are notable.

Read the full opinion editorial at Forbes.com

About RegulatingWallStreet.com

The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors