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Comment by mattmaroon | Hacker News Reader

There are definitely a lot of perverse incentives that lead up to this, but they seem to be largely the fault of private enterprise.

If an executive's compensation is largely based on options, then every share price at the time they come due that is below the strike price is the same to him. So if he's given the option to purchase shares for $50 each in a year, then he makes the same if his company is trading at $49 as he would if it were trading at $2.

Add in a golden parachute and he's in a situation where his incentive is to gamble. If things go well (for instance, if people with bad credit somehow paid their mortgages consistently) share prices might be at $100. And if they tank, well, he gets his $12 million and floor seats at the Knicks games for the next 5 years, which is the same thing he'd get if things only went a little down hill.

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There are definitely all sorts of problematic incentive structures all over the place. And they're definitely a problem. I think that just goes to show they're inevitable to a degree, that they're survivable & that free markets are not a silver bullet. These bailouts are certainly a push in the wrong direction, but unless I'm missing something, they're a very minor push. As you say, options as incentive are worse.

Compared to the other effects, that doesn't even show up on any kind of radar. For one thing, these companies are now essentially nationalised. Just the implications in terms of international politics & rhetoric are pretty big.

What did nationalisation do to the incentives of shareholders of other too-big-to-fail companies? What did it do the the execs. From the 1 year ago perspective this is still failure. 'This stock might lose 100% of it's worth' & 'this stock might lose 93%' look very similar when you are sitting on 100%. If any kind of serious distortion happens it probably happens near the bottom when things are pretty chaotic anyway. Executive compensation might be causing distortions, but the US' new found nationalisation policy has nothing to do with that.

Netcan, if this exercise does anything it should prove to most that free markets do work and one of the reasons they work is that they always have lots of "silver bullets" to spare. What we are watching now is silver bullets riddling companies and company execs who probably need to be riddled with silver bullets.

Unfortunately some innocents will end up going down with the ship but this has always been the case. Events like we are watching right now are caused by human weakness and human failings not by free markets.

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