Hearsay: Short takes from faculty op-eds on business and finance

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The Compensation Game
Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84 and Rakesh Khurana, professor at Harvard Business School
Forbes India
April 8, 2013

“Reports about the high pay of star athletes are often greeted with awe and approval rather than outrage. The rise of executive pay, its defenders claim, is no more problematic than the fact that, say, Red Sox slugger Manny Ramirez is paid much more than earlier stars like Ted Williams.

“But the process affecting the compensation of star athletes is quite different from the one that determines CEO compensation. … Because the CEO market is not, in fact, operating like others, the presumption that it will produce efficient outcomes is unwarranted. The problem is not just one of excess pay. Flaws in the pay-setting arrangements for corporate leaders have produced arrangements that dilute or even distort incentives. For example, executives continue to enjoy broad freedom to unload options, a practice that enables executives to benefit from increases in short-term stock prices that come at the expense of long-term value. …

“Without real reform, compensation programs in the world of business and the world of sports aren’t even in the same ballpark.”

London Whale Is the Cost of Too Big to Fail
Professor Mark Roe ’75
The Financial Times
March 24, 2013

“The dollar estimates of the too-big-to-fail subsidy to the largest banks range into very high numbers. … Moody’s, the credit rating agency, estimates Citigroup would be near to junk bond status in credit quality if it were not for the fact that the state is assumed to back it. It is only because lenders lower their interest rate to too-big-to-fail companies such as Citi that its debt is anywhere near investment grade.

“So that’s the choice for the shareholder: they can own a degraded, too-big-to-fail behemoth, but one with a hefty, not fully visible too-big-to-fail subsidy. Or they can have one that is well run, allocates capital effectively and does well by its customers, but does not enjoy the subsidy that creates much of the present shareholder value. …

“We pay once as taxpayers, visibly and big when taxpayers’ billions bail out the biggest financial firms. And, long before then, we all pay continuously as financial consumers because the too-big-to-fail subsidy means that big financial conglomerates can be profitable for shareholders, even while being poorly run.”

A Financial-Reform Agenda for Obama’s Second Term
Professor Hal S. Scott
Bloomberg View
Jan. 13, 2013

“[W]e must return to our regulators the tools—taken away by the 2010 Dodd-Frank Act—that enabled the U.S. to survive the most pernicious aspect of the 2008 crisis: the contagion following the collapse of Lehman Brothers Holdings Inc. Had Dodd-Frank been enacted in 2008, the financial meltdown would have been even more devastating.

“The Federal Reserve can no longer provide liquidity to nonbanks without the consent of the Treasury secretary. The Treasury can no longer guarantee money-market-fund investors against runs, and the Federal Deposit Insurance Corp. can no longer insure senior debt or increase insurance on deposit accounts without congressional approval.

“These backstops are politically unpopular, and should only be deployed in extreme circumstances, but they should be available if needed.”

The Best Way to Reform Health Care—and Cut the Deficit
Professor Einer Elhauge ’86
The Daily Beast
Jan. 6, 2013

“[T]he fragmented nature of the U.S. healthcare system is remarkable. … Why isn’t health care … like other industries, where large integrated corporations coordinate multiple personnel and costly machinery to achieve a valuable result and have the incentives and control to do so as efficiently as possible? The reason is simple: current law gets in the way. …

“The Obama administration should use [its] powers to adopt regulations that both preempt legal obstacles to health-care integration and allow payments to corporations that would orchestrate all the providers necessary to provide valuable health outcomes. The result would be improved health care that would likely save tens of thousands of lives, avoid hundreds of thousands of injuries, and save hundreds of billions of dollars in medical costs.”