It's been a year since the onset of a financial crisis that wiped out $15 trillion of wealth from the balance sheet of American households, and more than two years since serious cracks in the financial system became apparent. Yet while the system has been stabilized and the worst of the crisis has passed, little has been done to keep another meltdown from happening.
Even the modest regulatory reform effort launched with much fanfare back in the spring is now bogged down by bureaucratic infighting and special-interest lobbying. And back on Wall Street, the wise guys are up to their old tricks, suckering investors into a stock and commodity rally, posting huge profits on their trading desks and passing out Ferrari-sized bonuses.
All of which makes it disappointing that so little attention was paid last week to a report by a panel convened by the Aspen Institute on the "short-termism" that has now become hard-wired into the culture of Wall Street and corporate America.
This wasn't just any blue-ribbon committee. Its members include billionaire investors Lester Crown and Warren Buffett; mutual fund pioneer John Bogle; Richard Trumka, the soon-to-be new president of the AFL-CIO; Marty Lipton, Ira Millstein and John Olson, the deans of the corporate bar; and respected academics such as Lynn Stout of UCLA.
Their complaint is that the focus on short-term financial performance by investors, money managers and corporate executives has systematically robbed the economy of the patient capital it needs to produce sustained and vigorous economic growth. They get to the root cause of the financial crisis in ways that other reform proposals have not:
- An excise tax on all security trades and a higher tax rate on short-term trading profits.
- A revised definition of the fiduciary duty that fund managers owe to their investors, along with compensation schemes that better align their incentives with long-term objectives.
- A requirement that only long-term shareholders be allowed to elect directors or vote on corporate governance issues.
- Fuller disclosure by private investment funds of their holdings and their compensation.
The roots of this short-termism go back to the 1980s, with the advent of hostile takeovers mounted by activist investors. As fund managers grew more demanding of the short-term performance of corporate executives, investors became more demanding of the short-term performance of fund managers. In time, the managers of the alternative investment vehicles began looking for new strategies to improve their results, and Wall Street was only too willing to accommodate with a dizzying new array of products.
At times, it seemed to work spectacularly. During the late '80s, the late '90s and again during the recent boom, investors earned record returns and corporate executives and money managers earned record pay packages. But after the bubbles burst, the gains to investors turned out largely to be mirages, while the gains of the executives and the money managers remained largely intact.
The fundamental problem, as the Aspen panel reminds us, is that the components of modern finance - the securities, the trading and investment strategies, the financing techniques, the technology, the fee structures and the culture in which they operate - are all designed to work together to maximize short-term results. And, in such a self-reinforcing system, it is difficult to change any one feature without changing the rest.