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July 14, 2011

Austerity Program for Banks

Stories in both the New York Times and Wall Street Journal said that European leaders are determined to stand behind any banks which fail their stress tests or are brought low by their holdings of Greek debt. The same leaders have not quite resolved how to deal with Greek debt despite Greece agreeing to an austerity program. Both bankers and national leaders insist that Greece and other countries (including the US) need a dose of public austerity so that they can both pay their debts and continue essential services.

So let's remix.

Countries should insist that banks which are being bailed out with public money, including low or no interest loans from central banks, need an austerity program of their own. How else can they both raise capital and still make loans?

The bank austerity program

  1. No employee of a bailed out bank can be paid more than the highest paid civil servant of the country the bank is located in.
  2. No employee of a bailed out bank may get a severance payment more generous than the best severance payment given a civil servant.
  3. No employee of a bailed out bank may have benefits better than the best benefits given to civil servants.
  4. These condition will remain in effect for any particular bank for two years after all bailouts, including interest rate concessions and guarantees, have been paid back at interest rates which are based on the risk to the government which made the loans or made the guarantees.
  5. Forget about changing employees to consultants, playing games with equity, or any pre-existing golden parachutes.

FAQ on the bank austerity program

Q. How will bankers live on civil servant salaries?

A. We all know that civil servants are overpaid.

Q. Won't bank management quit?

A. :-} Remember this only affects the management of banks which need to be bailed out. The rest can still pay management whatever they want tppay them..

Q. How will you get anybody to run the bailed out banks at these wages?

A. Well, there are the laid-off civil servants. May be better to have people with private sector experience, though. Plenty of them available on the job market, too.

Q. But they won't be qualified?

A. Are the current managers "qualified"? If so, why do the banks need bailouts?

Q. Won't bank executives refuse to apply for bailouts if they know they will have to change their lifestyles?

A. If the bank doesn't need a bailout, not applying is a good thing. If the bank does need a bailout and management refuses to apply, that's a dream lawsuit for breach of fiduciary duty. Better not cut lawyers salaries yet (except those who work for bailed out banks).

Q. Will the bankers riot in the streets?

A. And burn their limousines and break their bank windows? A pin-striped riot would be fun to watch, though.

Q. Won't all the bankers go to countries which pay them better?

A. Such as? And who's going to bail them out there?

Q. Won't this cost jobs?

A. Are you kidding? For every $10,000,000 a bank doesn't pay its CEO, it can make $100,000,000 in loans to job creating enterprises.

Q. Why wasn't a bank austerity program imposed before?

A. See campaign contributions.

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