Fixing Wall Street
June 9 2009 by Fayazuddin A. Shirazi
For Mark Cuban, the billionaire entrepreneur and owner of the NBA basketball team, Dallas Mavericks, the crumbling scenario at Wall Street cannot be fixed merely by limiting CEO pay; rather the administration should do exactly the opposite, he says. “Rather than limiting pay on Wall Street, I would ask the Obama administration to recognize the real problems and fix them,” he says pointing out that if CEO pay is limited in a blanket rule, innovators will leave exposing companies to further chaotic conditions. However, he doesn’t say anything about how to identify innovating minds among CEOs.
The real problem, thinks Cuban, is with the attitude entrepreneurs have today. He feels that financial entrepreneurs are not very keen to innovate preferring to rely on tried and tested financial instruments.
Commenting in his blog –Blog Maverick- Cuban, who calls for granting of licenses for every new financial instrument a company creates, Contrary to conventional wisdom, he argues, consistency doesn’t reduce risk, but rather increases it. “In financial markets, players realize that they can make enormous money by copying what already works and applying bigger dollars to it. As the consistent track record of the scheme has been well documented over the years, it’s an easy sell to bankers or investors to lend you money, which will be not the case if someone comes up with a new business idea, he says.
Ridiculing businesses that have plainly copied others without realizing the potential risks in it, Cuban says: “First there are innovators. Then there are imitators. Then there are idiots (Read: copy cats).”
So, how did Wall Street mess-up? “The problems came from the idiots who thought there was no risk in adopting the existing models since it worked for the others, and this attitude caused the market to inflate quickly which ultimately left the entire financial system in lurch,” he reiterates.
“Its starts off with “I have a great idea” that makes money. Then someone says “that’s a great idea, only XYZ is doing it. They made a ton of money. We should do it too.” Then it becomes have you seen what is happening with XYZ, ABC and DEF? They are making a killing. We need to be there too.” Which in turn becomes, “everyone is doing it and making money. We can get in on it with my broker or banker.” Then its over,” he quips.
Cuban, who is also the President and Chairman of the HDNet, says, when multiple financial institutions on Wall Street get beyond big, the profits they are required to generate also grow beyond the label of big, something beyond anyone predicted or envisaged. Such companies become institutions that are “too big to fail”. Additionally, the amount of capital, they are required to put at risk generates what is now referred to as “systemic risk” and when these “too big to fail” organizations actually fail, they expose the entire economy to great risk, feels Cuban.
Cuban argues that the U.S Treasury be empowered to grant a special license for every new financial instrument a company creates, instead of safeguarding it under patent laws.
Once a new product is vetted and found to be unique the companies should be given substantial time to market and sell their products. “This exercise will help the government to keep a tab on all the new financial instruments that are being envisaged and marketed. It will also give the innovators a chance to see how the “law of unintended consequences” applies to their products, before the copycats get their shot at it,” reiterates Cuban.
In order to retain the innovators and keep the copy cats at bay, Cuban feels, innovating CEOs should be encouraged by paying them better. “If you reward the innovators and make it easier for them to make money, you (Obama) will be able to monitor, reform and understand the impact of the new financial products before they become generic and the idiots get hold of them,” he says in an advisory note to President Obama.