This is the reason you're my first read in the morning, GREAT effort. Thanks. (& yes, I did oversleep this am.)

Professor Schwartz thinks you are constrained by your high position in the esteem of the serious from saying what you really think, which is that making a profit is not Mr. Mudd's true job description.

While I'm not sure he has the precisely correct diagnosis, since it is generally true that CEO compensation and tenure are unrelated to company performance, there must be something affirmative going on here, beyond mere tolerance of incompetence. In other words, CEOs must be good at something in order to get their jobs and be paid millions of dollars. Whatever that is, you and I don't know how to do it. So what precisely is it?

You owe us the answer.

Thanks Dean,

You put a smile on my face to start the morning.

Think of how many completely incompetent men have been running big financials into the ground. O'Neal, Prince, Mudd, ... The one thing these highly paid CEO have in common: they all follow the herd. If everyone else was jumping over a cliff, they knew that had to be the thing to do. To answer cervantes, corporate executives are particularly able to sense the direction of the herd. Independent thinkers need not apply.

Dean - You're not defining "skill" broadly enough. The key skill of a CEO is to present a management presence, and to manage the board of directors. This person sells himself as a safe choice, and often the bulk of his work is to continue to convince the board that any change would be riskier than the status quo.

The fact is that the combination of management "hair" and ability to sell the board on a vision does not exist broadly...there aren't that many people who "feel" like a big-company CEO. Could a monkey throwing darts do better? Sure. Would replacing idiot-face (sorry, Mr. Rich and Powerful idiot-face) with said monkey improve things? No, and that's why he's still there...his skill is making all the deciding parties think that every other alternative is just a monkey.

Tom C,

What utter hogwash.

The mission of any CEO is to lead a business organization to success.

When the facts so clearly demonstrate that a CEO lacks a vision of success for his organization that CEO has failed and deserves to be fired.

Ron, the mission of a CEO should be "to lead a business organization to success", but what we see is that their mission is actually to line their own pockets and those of their cronies.

I think QrazyQat is right on this one. The successful performance of a CEO depends on the criteria used to evaluate it. He was paid handsomely during this period, maybe even got bonuses, and generated debt large enough where it was obvious (even 3 years ago) that the government would not let it fail. He privatized the profit and socialized the debt. Who can say that is not successful by some measure?

Ron, I love the positive nature of your post. Every CEO would agree with you, even deep inside; their egos are large enough to believe that their continued reign is synonymous with leading their organization to success.

But the skill set to get the job is entirely wrapped up in my post: selling the board and looking like a leader. The average minimum wage worker has neither of these skills.

I think QrazyQat has nailed it. CEOs and their cronies, as well as the heads of so many big financial outfits (e.g., Bear Stearns) and their cronies seem to focus on the fastest and quickest schemes to make the biggest profits, the next financial quarter or year be damned. And the rest of the big money folks are happy to go along for the ride as long as huge bucks are being made.

Dean, as you well know (e.g., "The Conservative Nanny State"), the growth in economic inequality has been caused in significant part by GOVERNMENT POLICY. Those policies --- cheered on by most of the media and many economists --- has promoted the power of big and corporate money at the expense of diminished power and income of lower income folks.

Of course there are many really good and prudent CEOs, but they and their ilk don't seem to drive economic policy. I don't know much about economic theory and principles, but, as the old song noted, you don't have to be a weatherman to see which way the wind blows.

One other skill set that the head of the GSE needs that QrazyQat omitted is selecting the right lobbyist and learning to wine and dine Senators and Congressmen and arrange speaking fees them at the annual shareholders meetings so that the can give earnest speeches about the importance of their institutions.

Thank you Dean for another great post.

mr mudd is an exemplar for the state of corporate governance in the us

his failed leadership continues to be reqwarded and he continues to be insulated from the consequences of his decisions

his situation seems to be the norm in corporate america today

ceo's get nba style mega contracts with nba style guarnteed monies despite performance

The quotes below from this article shows that Mudd was doing what his superiors told him to do. He had "quotas" for low-income borrowers. Since these individuals did not have sufficient income to meet normal criteria for granting a mortgage, they sold mortgages that required no evidence of income.

This, of course, resulted in market collapse for which those who pay taxes, and foreign pensioners, pick up the tab. PC is not harmless.

"Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers."

"Fannie Mae aimed to benefit from subprime loans and expand the market for them -- and hoped to pass much of the risk on to others, documents show. Along with subprime loans, which were typically issued to borrowers with blemished credit, the company targeted so-called Alt-A loans, which were often made with no verification of the borrower's income."

Dean, nice post but you are thinking small. Don't you know by now that Mudd would never settle for seven figures? He took in $11,648,409 last year, according to Fannie's SEC filings.

Dean,

No doubt that Fannie Mae was poorly run and managed. Stress testing on collateral value and in this case, the house value, is only one form of stress test. They also did stress test on repayment capacity, which was a joke as well, only if you know their underwriting standards.

Yes, Mudd has a lot of explaining to do.

Similarly, an economist (on this blog) should have recognized that the IndyMac failures is not the second largest in history when adjusted for inflation.

So the CEO is take blame what about the board. I remember Republicans wanted to give Wall Street the most profitable part of Fannie Mae.

Who force Fannie Mae to take sub-prime.

What did the Clinton's Adminstrations Secretary of Treasury do in this regard.

What about the regulators. What happened to them.

Wall Street thought they could do the job of Fannie Mae and make huge profit. So they made the politicians and regulators sleep at the switch.

Fannie Mae should have never been a for profit corporation.

Don't forget Fannie Mae is new deal agency. Libertarians and Conservative want to dismantle it. Incompetence is just an excuse. Who is going to be punished for this.

Robert Hume wrote, The quotes below from this article shows that Mudd was doing what his superiors told him to do. He had "quotas" for low-income borrowers. ... This, of course, resulted in market collapse for which those who pay taxes, and foreign pensioners, pick up the tab. PC is not harmless.

It's very possible that this has some effect.

That it had a first-order effect is not really believeable, however, because it affected more than just the GSEs. And while those other banks are under regs that encourage lending to less-well-off folks, the idea that that was a prime incentive for the banks doesn't pass the laugh test.

Tom C wrote, But the skill set to get the job is entirely wrapped up in my post: selling the board and looking like a leader. The average minimum wage worker has neither of these skills.

You're confusing "is" and "ought".

From the point of view of "is", you're absolutely right.

From the point of view of "ought," you're absolutely wrong. The CEO's role ought to be one of maximizing long-term firm profit.

But instead, as QrazyQat points out, they're actually abusing the principal-agent relationship they have with the firms stockholders, which is widely acknowledged to be a problem in modern corporate governance.

The conflict of interest between corporate executives and shareholders - and in this case the taxpayers who back up the corporation - was noted by Adam Smith, and it is a problem which has never really been solved. Paying executives with stock options has just caused them to try to pump up the stock price temporarily - with their high compensation and low tax rates they can make a fortune in a few years, and have little interest in the long-term performance of the company.

Low marginal tax rates are not necessarily an incentive for long-term economic benefit.

Liberal - I'm not sure I agree with your "ought"...the job that the board wants is to raise the stock price. Despite the religious beliefs of Finance professors, there's no guarantee that "maximizing long term profit" is going to help the stock price. There is a correlation, but it's with quarterly manipulation for steady looking growth...which is why boards use short term instruments, like options, for incentive pay (mixed with stock grants to be sure).

Because they are so maniacally focused on stock prices, which are only somewhat under the control of the CEO, they would hire and fire people for the job constantly based on the markets. But since no one will take a job under those circumstances, CEOs negotiate contracts whereby the board is punished for removing them. These termination clauses have the perverse affect of paying them immensely when things are going poorly...leading to Dean's original post.

Tom C wrote, Despite the religious beliefs of Finance professors, there's no guarantee that "maximizing long term profit" is going to help the stock price.

Of course profit is going to help stock price in the long term, because the true value of a stock is sum of the discounted stream of future earnings.

There is a correlation, but it's with quarterly manipulation for steady looking growth...

Yes, but that's looking at short-term correlations only. "Correlation" depends on what time scale you look at.

...which is why boards use short term instruments, like options, for incentive pay (mixed with stock grants to be sure).

But as you insinuate yourself, short-term earnings are meaningless measures of firm performance and are subject to manipulation.

A firm ought to be concerned with maximizing long-term profit (aside from rare one-off situations where a large windfall can be captured and then liquidated).

The whole focus on short-term results is mixed in with the principal-agent problem, which you would understand if you knew anything about this topic.

Liberal: If I knew anything about the subject...nice one. Somewhat ad hominem...since you have no idea who I am and simply continue to make assertions and demand that I stipulate their truth.

There is absolutely no proof whatsoever that the stock price on any given day reflects your "True value". Period. There are so many factors outside the control of running a business well (for example, multiples going down in a sector for no obvious reason, Foreign Exchange issues, etc.) that an actual person running an actual business (note: no Finance professors have been invited) will simply take on the task of "short term" manipulation of stock prices however they can get away with it (some legal, others questionable, others clearly illegal). I can infer from your comments that you've never run such a business, but if you have, and used your philosophy, you have my respect. Still, my point is that most boards couldn't really care less.

I disagree with your assertion that a CEO ought to maximize long term profit, as he (or she, occasionally) is dead in the long term.

Actually, the value of STOCK ought to be the value of the dividend stream plus the final payment if any. Any connection to the economic profits the company earns is purely secondary.

Stock has no legal right to a dividend or to withdraw the investment it represents. Accordingly, in a competitive product market, the stock ought to be treated like a sunk cost, and like any sunk cost, should be uncompensated: any company that pays a dividend has an expense that its competitors don't have and that, therefore, it cannot recover from consumers.

Finance professors, therefore, ought to assume that all economic profits will go to corporate actors who/which are able to withhold their services, and especially ones with some degree of monopoly power: unionized workers, CEOs who convince their boards that they are irreplaceable, suppliers or customers in not-fully competitive markets. Since the finance markets appear quite competitive, they should compete returns down to marginal cost, which in the case of pre-existing stock issues is -- zero.

Is anyone surprised? Lebergott debunked the whole skills and education thing back in the 1960s.

Tom C wrote, There is absolutely no proof whatsoever that the stock price on any given day reflects your "True value". Period.

So? I never said that the market would reflect fundamental value in the short run.

Somewhat ad hominem...since you have no idea who I am and simply continue to make assertions and demand that I stipulate their truth.

It's not ad hominem---I don't need to know who you are to point out that you don't know what you're talking about. I can get that from what you write. Hence, no ad hominem.

I can infer from your comments that you've never run such a business, but if you have, and used your philosophy, you have my respect. Still, my point is that most boards couldn't really care less.

I don't care if most boards could care less. We're operating in the world of ought here: Dean's original post was that CEO's get huge compensation even though their contribution to the fundamental value of the firm is often negative. Obviously, in the world of is, they do commit such theft. So the context is ought, not is.

There are so many factors outside the control of running a business well (for example, multiples going down in a sector for no obvious reason, Foreign Exchange issues, etc.) that an actual person running an actual business (note: no Finance professors have been invited) will simply take on the task of "short term" manipulation of stock prices however they can get away with it (some legal, others questionable, others clearly illegal).

Which omits the fact that not all businesses are corporations.

Which also points out an easy solution: change laws governing corporations to provide incentives for maximizing long term profit and penalties for artificial manipulation of short-term
results.

I'd say from your tone that you wouldn't like that and approve of the ongoing theft, but you're so unable to distinguish is from ought that I can't make the claim.

The main skill that is desired today is skill at being a team player. In other words, skill at not making waves. One other skill is being able to turn out lots of stuff--accuracy and quality are not as important. The third desirable skill is working for lower than average wages, including putting in 55 hrs/wk for 40/wk hrs pay. (However, the latter is often part of being a team player.)

I disagree with your assertion that a CEO ought to maximize long term profit, as he (or she, occasionally) is dead in the long term.