Capitalism's Fundamental Principle
by Travis Pantin
Thu, 17 Jan 2008 at 9:47 PM
Has capitalism failed Countrywide Financial Corporation? An anonymous blogger at Accrued Interest thinks it has.
"Capitalism works on a few simple principles. … But the most critical and most fundamental principle is that of incentives," he writes.
The blogger says the chief executive officer of Countrywide Financial Corporation, Angelo Mozilo, may have faced incentives that didn't act in the long-term interest of Countrywide shareholders. Mr. Mozilo is expected to receive a large paycheck after Bank of America acquires Countrywide, which has suffering greatly from the risky subprime mortgage investments it took on.
"If Mozilo wanted to grow his personal wealth by pushing the share price higher in the short-term, he would do well to bet heavily on good times. All the while knowing that if it all went to hell, he would just sell the company and collect his exit pay," the blogger writes.
"Now, we don't actually know what Angelo Mozilo thought about the housing market in 2005 or 2006. We know what he said publicly, but we'll never know what he really believed in his own mind. Perhaps his motivations were noble, and he was merely wrong about the lending business. Even if that's true, the fact that his incentives were otherwise is a serious problem for modern capitalism," the blogger writes.
The Accrued Interest blogger says that there is no easy fix to the problem, although it might help if investors put more pressure on compensation committees to create better incentives for CEOs.
"The sub-prime mess will come and go. This is a bigger problem," he writes.
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