No questions about $35,000 commodes or $87,000 rugs, but John Thain — chairman and CEO of CIT Group and former CEO of Merrill Lynch — had plenty to say about the 2008 crisis (of which he was a central figure), Wall Street compensation, the Fed, the “London whale” and much more.
Thain told Bloomberg Television on Tuesday that there was “too much fragmentation and insufficient transparency in the stock market and that dark pools should be eliminated.”
Thain, who infamously spent $1.2 million on redecorating his office as Merill foundered, went on to speak about bank compensation, saying that good risk management requires attracting and paying for top talent and that “the problem is bonus is a bad word these days.”
Thain on why he believes a 2008-style crisis could ‘absolutely’ happen again:
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“Well if you look at hundreds of years of markets, there have always been periods of time when you get overexuberance, you get overleverage. You get bubbles of some type, and then those bubbles burst. And there’s nothing that would lead you to believe that that can’t happen again. There’s a great book written by Kindleberger on manias, panics and crashes, and it chronicles crashes and manias and panics over a couple hundred years. And it’s just – it’s the type of things that markets are susceptible to.
“We’re right now in a post-bubble period. And the post-bubble period tends to be safer. Leverage is lower. The lending environment is more conservative. And we’re seeing economic growth, but weak economic growth. And so you don’t see excesses right now in the system, but over time as people get more confident, and in particular as money remains very, very cheap, there is certainly a risk you get another form of a bubble.”
On the London whale and whether regulators are really equipped to regulate the big banks:
“Well the London whale [who cost JPMorgan billions in trading losses] was a very different thing. It wasn’t a loan. It wasn’t lending. So the very complicated financial institutions when they’re trading in very complicated instruments, which those were, that are a much more difficult question for the regulators. In terms of pure lending, they can get their handle on — on loans to leveraged institutions.”
On whether those in risk management get paid enough or are respected enough that they can actually be influential:
“So I think this is a really good question, and it depends a lot on the financial institution. As you know, one of the jobs I had in the past was at Goldman Sachs. I was the CFO, and all of the risk management reported to me. Goldman had a unique philosophy of emphasizing risk management just as importantly as the risk takers … And so if you emphasize it correctly, if you take the most talented people and if you pay them, you can make risk management just as important as risk taking.”
On Wall Street compensation: “The problem is bonus is a bad word these days. And so people don’t like the concept of bonuses. So think about it differently. Think about it as variable compensation. It has to be better to have variable compensation so that you can adjust compensation for the performance of the person, for the performance of the business, for the performance of the company. Because if you just had fixed compensation, which you could do, you could just pay people fixed amounts, but then you don’t have the flexibility that the variable compensation gives you.”
On whether anyone actually institutes clawbacks in a real way:
“So JPMorgan is the perfect example. They are in fact, to my understanding based on what I read in the press, clawing back money from the traders who lost that money. So they are in fact going to do that, and that’s a good thing.
“So first of all, if you use equity as a substantial portion of people’s compensation, you do tie them to the shareholders. And so if they cause big losses or cause the failure of an institution, they will suffer along with their shareholders. That’s a different question when you get to the taxpayers and should the taxpayers be supporting these financial institutions. But from a shareholder point of view, if you use a lot of equity, you do in fact line up your employees. And if you tie it to long-term performance, along with clawbacks, you do in fact get better alignment.”
On how he would fix the stock market: