Corporate Governance

With the shocking collapse of multiple banks and financial institutions in recent months and staggering losses to shareholders, Congress clearly needs to forge a bailout package to stall the economy from further downward spiral.

In my view, the primary factor that got us into this mess is the egregious mismanagement and short-sightedness of boards and CEOs of these institutions, who took inordinate and leveraged risks with stockholders money, not simply external factors like the housing market slump.

Business cycles happen. Obviously, responsible managements should have planned for this possibility and not blindly invested in subprime mortgages and other toxic instruments.

Unfortunately this has been a disaster for shareholders, many of which are pension funds for working people. These shareholders are paying for the mistakes, while managements are leaving with huge bonuses, such as the $2.5 billion package for Lehman executives after the bank collapsed.

I have long maintained that there are too many laws in this country that protect inept managements and don?t give stockholders enough power to throw out these managers. The banking industry is a prime example.

The bailout is one answer. But perhaps the most important solution is to bring private money into these institutions. We need to have management accountability to induce private money to come into the financial industry.

The U.S. Federal Reserve recently relaxed bank ownership rules to allow an investor to buy up to 15 percent voting stake in a financial institution, up from 9.9 percent. In certain circumstances, an investor could have up to two seats on a bank?s board.

These are baby steps in the right direction, but they won?t do enough to attract enough private money that the industry desperately needs during this crisis.

Private equity and hedge funds control hundreds of billions of dollars and many, including Carlyle Group and JC Flowers, have stated that are interested in investing more heavily in the financial services industry.

But now that top buyout fund TPG likely lost $1.35 billion in its minority investment in the failed Washington Mutual, many will be understandably reluctant to pour money in unless laws are changed to allow for more control over their investment.

The financial services industry has historically been one of the most profitable investment sectors. If laws were changed to allow for more private investment and management changes, the sector can be nursed back to health, backstopped by government funds.

Democrats and Republicans alike were right to challenge Treasury Secretary Hank Paulson?s sweeping $700 billion plan to buy the toxic debt of financial institutions ? mainly because it contained no provisions to make managements accountable for their mistakes.

If private equity money were allowed to invest more heavily in financial institutions and manage them, they would be better able to value the illiquid assets that got them in trouble to begin with.

The Paulson plan will likely go through in some form, but legislators are right to demand provisions that would allow oversight and review of the Treasury?s action for this kind of taxpayer money.

Importantly, lawmakers should pass enhanced "clawback" provisions that allow for the recovery of CEO bonuses, as well as restrictions on executive compensation for firms that sell their assets to the government.

In my view, there is nothing more egregious than a CEO or other top executive getting multi-million dollar payouts after the company they were overseeing goes under.

This certainly applies to Stan O'Neal, who left Merrill Lynch as CEO last October with about $130 million in stock grants and options at a time when Merrill was deeply involved in the mortgage-backed securities market. The firm took billions of dollars in losses as a result, prompting its sale to Bank of America.

Before the U.S. taxpayer pays a dime to Merrill and Bank of America to buy its junk loans and derivatives, it should explore whether it can take back egregious compensation packages paid to current and former top executives.

That should also apply for any other bank participating in the program, including Citigroup?s former CEO Chuck Prince, Bear Stearns' Jimmy Cayne, Lehman?s current CEO Dick Fuld and all the others.

The hapless taxpayer should not be punished for the mistakes that drove these financial institutions off a cliff.

This clawback should also apply to Lehman, which set aside some $2.5 billion to pay bonuses to top executives of the firm, the bulk of which is being sold to Barclays. Again, they shouldn?t get these bonuses if taxpayers are forced to buy their toxic assets.

Similarly, the government must have the right to take substantial equity stakes in companies that participate in the loan buyout program and demand transparency on the part of the Fed so taxpayers can know what they hold, where the assets were purchased and for what price.

This kind of transparency is essential if the program is to achieve its objectives in reviving the debt market and not simply rewarding incompetent managements.

We live in a capitalist, free-market economy. There must be accountability at companies, especially those seeking public aid to discourage further raids on the Treasury. It is the only way our system will survive.