greedy execs

http://business.smh.com.au/business/huge-executive-bonuses-broke-economy-20081203-6qqb.html?sssdmh=dm16.349130

Huge executive bonuses broke economy
AdvertisementEmail Print Normal font Large font AdvertisementJacob Saulwick and Jessica Irvine
December 4, 2008
Page 1 of 2
WITH the economy close to actually starting to shrink, the former governor of the Reserve Bank has pinned the blame for the financial turmoil on executives who took excessive risks to secure multi-million dollar bonuses.

National accounts figures released yesterday painted the weakest picture of growth for eight years. The economy grew by just 0.1 per cent in the three months to the end of September, for an annual rate of 1.9 per cent. Excluding the farm sector, the economy shrank by 0.3 per cent.

The Bureau of Statistics report came as Ian Macfarlane, in a rare public appearance, told the Lowy Institute in Sydney last night that excessive debt and risk-taking, driven by the misguided belief that double digit investment returns could last forever, was the root of today's problems.

Mr Macfarlane, who witnessed a huge expansion of debt during his decade in office, pointed the finger at a complex system of perverse incentives that had rewarded those who chased high returns and chose to "ignore or downplay the risks".

These included mortgage brokers, who earned commissions for writing loans to as many people as possible, and international credit rating agencies, who were paid for their services by the promoters of debt.

"The biggest misdirected incentive was the performance-based pay structures which awarded massive bonuses to the management of financial institutions on the basis of short-term profit results," Mr Macfarlane said. "Annual bonuses in the millions

or tens of millions of dollars were available to the most successful profit earners, and, of course, were not returnable when the short-term profits were lost in subsequent years."

Policymakers around the world, who had previously lacked any "curiosity and scepticism … about what was going on around them" should pay more heed to the risks involved in this type of reward structure, he said.

The Treasurer, Wayne Swan, said the growth report showed Australia's resilience compared to those developed countries already in recession.

With the US, Britain, Germany, Italy, Spain, Japan, Singapore and Hong Kong all recording negative growth in the September quarter, yesterday's figures were a positive result, he said.

The NSW economy, which had been among the nation's most sluggish, recorded a relatively strong 0.6 per cent growth.

The Treasurer chided Westpac and the ANZ for withholding up to a fifth of Tuesday's 1 percentage point rate cut from their customers. "I don't believe that there is any real excuse for not passing on this latest RBA rate cut in full," Mr Swan said.


The bureau's report captured only the first weeks of the chaos triggered by the failure of investment bank Lehman Brothers on September 15.

Since September, some economists believe the economy may have started to contract. But Mr Swan said lower petrol prices, interest rates and, from next week, $8.7 billion in cash payments, should have a positive impact.

Household consumption increased by 0.1 per cent in the quarter, but has been flat for the past six months. Purchases of motor vehicles dropped 7.9 per cent and spending at hotels, cafes and restaurants fell 0.7 per cent.

In coming months, Australian firms will not benefit from high resource prices. The country's terms of trade - or ratio of export prices compared to those paid for imports - rose by 5.6 per cent in the quarter, to be 20.6 per cent higher for the year. But economists say the terms of trade have since started to fall.

Mr Macfarlane said it was impossible to sustain double-digit investment returns.

In Australia, a return closer to 6 per cent - equal to long-term growth in the economy, not adjusted for inflation - was all that should be expected.

"We will just have to get used to the fact that long-run returns are going to be a lot lower than we thought they were based on the buoyant years of the 1980s and 1990s," he said.