Why Boards Should Be Proactive, Not Reactive

When the Obama administration moved to force the resignation of General Motors CEO Rick Wagoner over the weekend, questions immediately arose about the role of the GM board and whether it should have recognized the need for a change in leadership -- before the government itself decided to take action.

Wharton management professor Michael Useem, an expert on corporate governance, notes that directors who "only monitor what an executive has done abrogate a bigger responsibility, which is to work directly with management on company strategy." One of the most significant changes of the last decade is "that independent, non-executive directors have become more directly involved in setting strategy. Did this happen at GM? I don't know. But it appears GM's board was not able to force the company to change, and, like Rick Wagoner, was not thinking strategically about what might happen to GM in the longer run."

Useem says the government's decision to force Wagoner's resignation is not a good model. "Independent non-executive directors have an enormous obligation -- in addition to protecting shareholder value -- which is to bring in the right top management team and get the wrong one out. To rely on a bankruptcy court, creditors or the U.S. government to make that change is probably a terrible precedent."

Indeed, says Useem, "everyone in the clutches of the government at the moment -- whether their company is involved in a bailout plan or is getting TARP money -- is probably looking over their shoulder, wondering whether the shoe could drop on them. If I were [Citi CEO] Vikram Pandit, [AIG CEO] Edward Liddy or [Chrysler CEO] Robert Nardelli -- and indeed, he could be next -- I would have a conference call today with my board to talk through what needs to be done to ensure that the biggest decision a board can make is not delegated to the U.S. government."

To outward appearances, Useem says, the GM board has been overdue on forcing restructuring. "The best time to restructure is when you don't have to. Wagoner has been in office since 2000. If a CEO [during that time] was not ready to take such measures as cutting production lines, getting rid of gas guzzlers and [reining in] expenses, that's where the board unequivocally does have a strategic function to be more proactive than reactive, more aggressively intervening."

Useem says that earlier this morning, a colleague of his "quoted today's Wall Street Journal headline -- 'Government Forces Out Wagoner at GM' -- and asked, 'In our lifetime, would you ever have expected to see those words?' It's a stunning headline."

WTO Report Raises Concern About Incremental Advance of Trade Barriers

As the Group of Twenty (G-20) Finance Ministers and Central Bank Governors prepares for its summit in London next week, the Financial Times reports that the World Trade Organization is urging nations to resist domestic political pressures toward protectionism in their responses to the global financial crisis.

“The danger today is of an incremental build-up of restrictions that could slowly strangle international trade and undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally,” the WTO said, according to the FT. While the WTO reported "no indication of an imminent descent into high intensity protectionism," it did note that the adoption of protectionist measures by member nations increased by 25% in 2008. It cited measures to restrict footwear imports, discourage steel imports and provide government aid to domestic auto industries.

Wharton faculty have also raised concerns about protectionist urges, particularly in the United States, where Congress added a "Buy American" provision to the Obama administration's $787 billion stimulus package. In a February article, "Trade Wars: Will Protectionism Win out over Recovery?" Wharton management professor Stephen J. Kobrin told Knowledge@Wharton that history points to an urgent need to defend free trade. "It's critical. It's pretty clear that protectionism exacerbated the Depression last time, and [economies] are more integrated now."

Auto Industry Researchers See Recovery, Urge Governments to Tread Cautiously

As the Obama Administration prepares to reveal a wide-ranging and complex plan to restructure the auto industry in the United States (see The Wall Street Journal: Auto Task Force Set to Back More Loans -- With Strings), an international team of academics focused on the global industry has offered a road map for its recovery.

That road map comes in a position paper from the International Motor Vehicle Program (IMVP), co-directed by Wharton management professor John Paul MacDuffie. The paper predicts that worldwide, the industry "will recover to pre-crisis levels as the global economy recovers," and suggests that "there is no 'paradigm shift' at hand." The paper also encourages auto manufacturers to look beyond today’s cost cutting to take steps that improve capabilities and the prospects for long-term viability: increasing production flexibility to ensure better response to demand shifts; preserving future product development and technology investments; sharpening the focus of product strategy (i.e. not trying to compete in luxury and budget categories simultaneously); reducing debt as soon as possible; and introducing process innovations.

Governments are urged in the paper to state clear goals -- job preservation, reduced environmental impact, or the establishment of a "national champion" to be the country's strongest competitor -- and to allow facts rather than the "political muscle of ... interest groups" to set policies in support of those goals. The paper does not offer an opinion on the use of bail-out plans; instead, it urges governments to adhere to policies and actions that are consistent with the pursuit of their stated goals -- and to "take a strong stance against trade protectionism." In an interview this morning, MacDuffie said the IMVP paper "purposely remained neutral on the policies of individual countries, including the bailouts" that have been used and may be expanded in the United States.

According to The Journal article today, the Obama task force will likely "say that it sees viable futures for both GM and Chrysler, but only if there are sacrifices from their managements, unions and GM's bondholders. The team will also lay out a firm timeline for action." Such steps, MacDuffie noted, would be consistent with his own view that the U.S. automakers should not be allowed to fall into bankruptcy. "It's better to go ahead with the loans and to make sure that they come with tough requirements for the automakers," he said.

Additional Reading:

Bailout or Bankruptcy: What Will It Take to Get the U.S. Auto Industry Back on Track?

Biggest by Default: Toyota May Be Number One, But It Still Faces Challenges

Behind the Curve: Have U.S. Automakers Built the Wrong Cars at the Wrong Time -- Again?

From The New Republic: Better Than A Bailout -- Here's how to rescue Detroit without forcing them into bankruptcy, by John Paul MacDuffie and Case Western Reserve University professor Susan Helper

Wall Street Managers, Vilified for the Financial Meltdown and Bonuses, Are Baring Teeth

"Civil War" is not a term normally expected in a headline to come from a conference of Wall Street big wigs. But there it was in The Wall Street Journal this morning: "On Wall Street, Talk of Trust and Civil War," with an account of a Tuesday "Future of Finance" conference, organized by the paper.

The Civil War reference came from conference attendee Glenn Hutchins, co-chief executive of private equity firm Silver Lake. "Washington and Wall Street," he said, "are the equivalent of Gettysburg and Antietam right now.... To point the finger at one group means, No. 1, you're not understanding the problem, two, you're stretching our social fabric thinly, and you're throwing the baby out with the bathwater.... Trust goes both ways." Former Securities and Exchange Commission chairman Arthur Levitt, also speaking at the conference, said the public and political bashing of Wall Street has become "an issue of 'we' and 'they.' ... Compensation is a part of it, but a symbolic part of it. We are a centrist nation.... We're now shifting to the left pretty far in terms of business-bashing and it has reached extremes of incivility that are intolerable."

And in an eye-opening op-ed article for The New York Times, Jake DeSantis, an executive vice president of the American International Group’s financial products unit, shared the letter of resignation he had sent to AIG's government-appointed overseer, Edward M. Liddy. "I am proud of everything I have done for the commodity and equity divisions of [AIG]," DeSantis wrote. "I was in no way involved in -- or responsible for -- the credit default swap transactions that have hamstrung AIG. Nor were more than a handful of the 400 current employees of AIG. Most of those responsible have left the company and have conspicuously escaped the public outrage." DeSantis wrote also that, like Liddy, he had agreed, "out of a sense of duty to the company and to the public officials who have come to its aid," to work for an annual salary of $1. He and his colleagues were told they would be rewarded with bonuses -- apparently in lieu of salary -- in March 2009. Because of government efforts to reclaim the bonuses in the face of widespread public outrage, DeSantis wrote: "...we in the financial products unit have been betrayed by AIG and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself."

Has the public's animus toward leadership on Wall Street and the rest of the financial sector become an unfair witch hunt? "That's a difficult and complicated question," said Wharton management professor Mauro Guillén, who directs Wharton's Joseph H. Lauder Institute for Management & International Studies. Generally, Guillén said, he cares little about the size of executive bonuses. More important, he suggested, is the structure of the bonus: What is the time period in which an executive's performance is measured, and what are the metrics on which performance is gauged?

But when the taxpayer is a major shareholder, Guillén noted, other factors come into play. Bonus obligations to executives at any government-rescued company should have been and should be closely scrutinized by the government officials leading the rescue. Even when bonuses are awarded based on the most appropriate criteria, "it's going to rub people the wrong way when on the one hand, you have taxpayers seeing their money go into a company and, on the other hand, bonuses are being paid to company executives."

When the bonus contracts have been reviewed and approved by government-appointed overseers at rescued companies, said Guillén, "obviously the rule of law is very important.... Respecting contracts is a very important thing. Without them, we'd have a real mess."

Additional Reading:

Outrage over Outsized Executive Compensation: Who Should Fix It and How?

In a Survey, Hedge Fund Investors Say They Expect Even More Withdrawals This Year

Hedge funds were staggered by a record level of withdrawals in 2008, but the worst is yet to come, according to a survey of hedge fund investors. Deutsche Bank found that more than a third of the 1,000 major investors it surveyed expect more than $200 billion to be withdrawn, $50 billion more than last year, the Financial Times reports today.

The growth in redemptions is the biggest challenge the fund managers face this year, according to the survey, which also predicted that more than 20% of today's active funds would be shut down by the end of 2009. Another challenge cited in the survey was demands by investors for greater transparency for the funds' strategies.

In a current Knowledge@Wharton article, several Wharton faculty members note similar challenges for the industry. "The hedge fund industry is really swooning at this point," Wharton legal studies and business ethics professor Thomas Donaldson said. "We're watching an industry whose bubble has popped."

He and other Wharton faculty added that an anticipated regulatory surge targeting various financial services is unlikely to spare hedge funds. Though the funds had little to do with triggering the global financial crisis, an argument for their regulation can be made by the interconnectedness of financial services. "The concern is that large pools of capital can contribute to systemic risk and systemic downturns. And that's a valid concern," said Wharton finance professor Marshal E. Blume. "Hedge funds have a large amount of money."

U.N. Panel of Leading Economists Calls for Council to Replace G20

When it gathers next week in London for discussions on the global financial crisis, the Group of Twenty (G20) Finance Ministers and Central Bank Governors will be advised that the G20 should be replaced by a  new Global Economic Council under the purview of the United Nations, according to a report in today's Financial Times.

The proposal is one of 10 in a broad plan to be put forward by an 18-member U.N. commission appointed last October to study reform of international financial institutions, including the World Bank and International Monetary Fund, according to the FT. The panel, headed by Joseph Stiglitz, the Nobel-prize-winning economist, also calls for a new global reserve system that would provide support to developing countries on a regular basis and would not be subject to veto by industrialized countries that dominate existing international financial institutions, such as the IMF.

The commission's proposal to support emerging economies with a contribution of 1% from industrialized nations' stimulus plans echoes one offered by World Bank president Robert Zoellick who -- writing in The New York Times and in a recent speech covered by Knowledge@Wharton -- proposed that industrialized nations should devote 0.7% of their stimulus packages to a "vulnerability fund" that would help stabilize the poorest of the poor during the global crisis.

Still, according to the FT report, the U.N. commission was critical of “misguided policy recommendations” by institutions such as the International Monetary Fund, closely allied with the World Bank, that have prevented developing countries from adopting the counter-cyclical stimulus policies being pursued by the developed countries.

Bonus Backlash Stirs Congress to Act -- and Posture

Standing in his driveway, the AIG executive was asked by a New York Times reporter about his life since the AIG bonuses were disclosed. The Times offered this account of his answer: "'You have to understand,' he said, 'there are kids involved, there have been death threats....' His voice trailed off. It looked as if he was fighting back tears. 'I didn’t have anything to do with those credit problems,' said James Haas, 47. 'I told [AIG chief executive Edward M. Liddy] I would rescind my retention contract.' He ended the conversation with a request: 'Leave my neighbors alone.'"

The article puts a human face on the the much reviled, bonus-blessed executives of bailed-out financial firms. Clearly, some don't see the bonuses as a blessing. Haas, labeled "Jackpot Jimmy" by the New York Post, is not the only bonus recipient who has offered to give the money back.

If Congress has its way, he and other "bonus babies" (another label from the ever-colorful Post) will be giving back at least 90% of the money in a special tax on bonuses paid to executives at firms receiving assistance from the Treasury. In his Times column today, David Brooks suggested the government was paying too much attention to the bonus backlash: "The Washington political class has spent the past week going into made-for-TV hysterics over $165 million in AIG bonuses. We’re in the middle of a mult-itrillion-dollar crisis, and our political masters -- always willing to throw themselves into any issue that is understandable on cable television -- have decided to risk destroying the entire bank-rescue plan because of bonuses that account for 0.001% of the annual GDP."

From The Washington Post comes this editorial comment: "By changing the terms of a deal months after it was entered into, Congress will show the government to be an unreliable partner, further draining confidence from the financial system and endangering long-term recovery."

Even before the AIG bonuses came to light and fueled broad public outcry, the bonus backlash was building. In a recent article, Wharton accounting professor Wayne Guay told Knowledge@Wharton that the government, under the leadership of President Obama and a Democratic-controlled Congress, would attempt to limit executive pay. "It feels like something the public wants." Guay noted the political importance of the issue: Companies receiving taxpayer assistance "can't afford to be giving the public a feeling that they're being excessive in any way, shape or form."

Will Limiting Foreign Workers Cause More Harm Than Good?

First rumblings, then an earthquake?

Yesterday, Praveen Togadia, secretary general of India’s Vishwa Hindu Parishad (VHP), a Hindu organization with strong lobbying power and ties to the Indian expatriate community, called for a boycott in India of American-made products -- a response to Congress’s recent move to prevent certain U.S. firms from hiring foreign workers, according to a report in The Economic Times.

At the crux of the issue is the H1-B visa program, which allows U.S. companies to hire skilled foreign workers -- a high percentage of whom come from India -- for up to six years. Based on a Congressional vote in early February, any financial institutions receiving bailout funding can no longer employ these workers if they displace potential U.S. hires.

“We are determined to take up this issue in a similar fashion by disallowing American products in India," Togadia said regarding the new policy.

On March 9, The Financial Times reported that Bank of America became the first U.S. bank to rescind employment offers to foreign MBAs in compliance with the new rules. In total, the bank has received $45 billion in TARP funding.

Reactions to the H1-B issue have been strong within the U.S., too. In an article titled, “The Open-Door Bailout,” New York Times columnist Thomas Friedman noted that the policy essentially puts the economy at greater risk. “We live in a technological age where every study shows that the more knowledge you have as a worker and the more knowledge workers you have as an economy, the faster your incomes will rise,” he wrote. “Therefore, the centerpiece of our stimulus, the core driving principle, should be to stimulate everything that makes us smarter and attracts more smart people to our shores.”

A new report released by the Kauffman Foundation, titled “Losing the World’s Best and Brightest,” shows that already, an increasing number of science and engineering students are returning to their home countries to start businesses – and that this trend is perhaps only enhanced by policy moves like the new H1-B visa rules. One of the report’s authors, Duke University executive-in-residence Vivek Wadhwa, told BusinessWeek: "Rather than inciting populist sentiment against foreigners and fostering a new nativism, policymakers could instead provide incentive programs to encourage foreign immigrant entrepreneurship, perhaps pairing fast-track residency status with launching of companies."

At last year’s Wharton India Economic Forum, India Knowledge@Wharton spoke with Wadhwa about his ongoing research on how immigrant entrepreneurs help the U.S. to keep its economic edge. (This year’s Forum takes place on Saturday, March 21. Although Wadhwa won’t be participating this year, some of India’s “best and brightest” will.)

Suzanne Nora Johnson’s Views on How to Change Corporate Culture – Including Compensation

At the recent World Economic Forum in Davos, Wharton management professor Michael Useem talked with Suzanne Nora Johnson, vice chairman of Goldman Sachs until 2007, about the global crisis, executive compensation, the Goldman Sachs culture and CEO succession, among other topics. Johnson currently serves on the boards of AIG, Intuit, Pfizer, Visa, Women’s World Banking and the American Red Cross, among others.

While the whole interview can be read here, KnowledgeToday highlights several observations by Johnson that seem especially relevant in light of the latest financial crisis-related controversies.

For example, asked about what many people consider to be outsized compensation packages for top executives -- or as Useem put it, “a strong public criticism that for too many people at the top, as their company is heading south, their compensation is going north” -- Johnson replied: “You can use internal equity as a good touch point, and what I mean by internal equity is looking at the differentials, from top to bottom, in an organization. No matter how good somebody is at the top, if you see that stratification getting too significant, it is a warning signal. It is a red flag. And the other thing I have found – [supported by] a fair amount of academic literature – is that the more unequal you make your compensation structures, the more you pay in total. Because often people are willing to take lower pay if they think there is real equity, parity and fairness. The more they think there’s unfairness in the system, the more they are chasing somebody who has a higher comp level who they are perceived to be a lot like.”

In response to Useem’s question about the need for a culture shift in the corporate world, Johnson again touched on compensation: Changing a culture “often revolves around compensation structures, [which] will likely be more transparent, rather than less ... and more long-term focused. For example, I can see compensation structures making incentives multi-year. I don’t mean stock vesting. I literally mean that your revenue targets – your earning targets – are multiple years, not single years. I could see clawbacks. I could see looking at internal rates of equity – meaning how much differentiation there is from the top to the bottom. All those things would have significant culture changes.”

By long-term compensation, “I actually like seeing multi-year timeframes,” Johnson said. “Clearly, you need to have some annual timeframes, because often budgets and investors are on that timeframe.... So you [need] some annual metrics. But I think two-, three-, five-year metrics can be very, very healthy protocols to go through. It generally lets you live in and out of business cycles. It gives you a sense of who performs particularly well in adverse conditions.”

Asked at one point whether she saw any signs in the financial services industry that we were headed for a global disaster, Johnson noted: “The most important warning sign was the fact that if you look back several years ago – and even as late as 2007 – the only undervalued asset class that you could find was risk. Literally, you could go to traditional asset classes, whether it was real estate, commercial/residential, whether it was emerging market debt or equities, whether it was private equity alternatives from venture capital to private equity – clearly the risk premiums were mispriced. Why I say they were mispriced literally [is that] there were no differentials from one very sterling credit to one lousy credit. That was a warning sign.”

On the subject of CEO succession planning, “companies that do the best are the ones where there is a very strong sense of succession planning, and there are multiple internal candidates who could assume the role,” said Johnson. “Because I do think understanding the culture, having been part of it, having paid your dues, having done the right thing, being rewarded, has incredibly powerful commercial impact – and also has very powerful incentives inside, organizationally. That’s not to say that, at times, you don’t need to go outside and find the best, because there are circumstances where you need to do that. But on the margin, where you can go inside, I think it’s very powerful.”

Small Business, a Dynamo of Job-creation, Gets a Bailout to Call Its Own

When big banks and insurance companies were being handed billions of dollars in bailout funding, many owners of small businesses grumbled, “Where’s our bailout?” They got their answer yesterday, when the Obama administration announced a package of measures aimed at increasing the flow of capital to small firms.

A statement outlining the terms of the package explains that “economic recovery will be driven in large part by America’s small businesses, which have generated 70% of net new jobs annually during the past decade.” As a result of the recession, though, the flow of credit to small business has dried up. For instance, loans guaranteed by the Small Business Administration (SBA) will amount to just $10 billion this year, half of what they have been in recent years.

The measures announced yesterday aim to ease the effects of this credit squeeze. One critical component is $15 billion that has been set aside for the purchase of securities linked to small business loans. This should help jump-start the secondary market for loans guaranteed by the SBA. In addition, the 21 largest banks that have received federal bailout funds will now be required to report their small business loans each month. Moreover, the Internal Revenue Service will allow companies with revenues up to $15 million to “carry back” their losses for up to five years. This means they can effectively get rebates on taxes paid in past years.

According to a report in The New York Times, President Obama emphasized the importance of these measures in a meeting with small business owners at the White House. “Today, too many entrepreneurs can’t access the capital to start, operate or grow their business,” he said. “Too many dreams are being deferred or denied by a form letter canceling a line of credit.”

Wharton professors have often criticized government bailouts because they tend to condone inefficiency. For example, many of them opposed the handouts that airlines asked for following the September 11 attacks in 2001. In the present instance, though, the small business stimulus is not just justified – it has been long overdue. And once small firms regain access to capital, their next step is clear: Start generating those jobs.

Yet More Transparency Comes to Swiss Banking

The leak in the dike of Swiss bank secrecy that opened up recently has turned into a torrent. In fact, it looks increasingly as if the dispute between Switzerland and the United States over personal banking records has helped to expose a growing intolerance worldwide towards offshore tax havens that is leading many of them to increase transparency, at least nominally.

Swiss Finance Minister Hans Rudolf Merz acknowledged late last week that the country “had caved in to outside pressure” from the U.S. to loosen the legal protection it had offered its banking industry, according to a report in the Financial Times. Switzerland now plans to abolish the strict distinction between tax fraud, a crime under Swiss law, and tax evasion, a civil offense, the Times story noted. That means foreign governments pursuing tax evasion cases will get more help from Swiss bank regulators. Until now, the Swiss maintained very strict bank secrecy policies except in clear cases of tax fraud.

Prospective bank customers in Switzerland “will never have the same level of confidence in the privacy of their accounts that they once had,” notes Wharton professor of operations and information management Maurice Schweitzer. Swiss banking has long been synonymous with secrecy, but the recent events have broken this bond, he says. And while some may argue that the practical effects of the government’s decision are minor because they affect only a small number of accounts, or that the main secrecy protections are still in place, “the psychological effects of this move are profound,” Schweitzer asserts. “The guarantee of absolute secrecy is gone. And more importantly, Switzerland has demonstrated that [it is] willing to change the rules.”

Wharton finance professor Franklin Allen calls the move by the Swiss late last week “a very important development.” Essentially, the Swiss have “backed down. As the FT makes clear, the key distinction in the past has been between fraud… and evasion…. In particular, they should now be willing to allow UBS to give the IRS the 47,000 names of [American account holders]… who are suspected of tax evasion. With regard to global financial stability, we can hopefully all sleep more soundly in our beds.”

Adds Schweitzer, “Ultimately, I think this is a good outcome. This helps to put international banking on a level playing field, and very importantly, this deters investors seeking to evade taxes.”

In the current issue of Knowledge@Wharton, published just before the latest Swiss announcement, Schweitzer, Allen and other Wharton professors discussed additional implications of the loosening of bank secrecy rules in Switzerland.

China, the Biggest Financier of U.S. Debt, Expresses Concern about Payback

It's a question every lender must ask: Is the borrower good for the money? But the query can be especially nerve-rattling when it is asked of the United States by its biggest lender, China.

“We have lent a huge amount of money to the United States,” China's premier, Wen Jiabao, said at a news conference in Beijing today. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.” Meanwhile, according to Bloomberg News, the People’s Bank of China said in a report that the U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis.

Wharton finance professor Richard J. Herring notes that such concerns "are usually expressed by mid-level bureaucrats." Wen's statement "raises the visibility enormously." While there could be many reasons for China to put such pressure on the U.S. -- the two nations have had long-running disagreements on currency-related trade issues -- Herring argues that there is good reason for China to be concerned.

"The U.S. Treasury bonds are not pristine; their credit default swaps [the cost of purchasing hedges against their default] are worse than many other countries' and even some corporations',"  he says. China "may be well alarmed by what the Congress did -- approving a $787 billion stimulus bill with 9,000 earmarks. It looked like Congress was paying no attention whatever to our future debt."

China holds the world's largest foreign-exchange reserves, reported at $1.946 trillion at the end of 2008. As much as two-thirds of that sum is believed to be held in U.S. dollar assets, primarily Treasury bonds.

But could Wen's public expression of concern be more about trade than faith? A recent Knowledge@Wharton article noted long-running complaints in the U.S. about China's manipulation of the value of its currency, the yuan. China's intervention is designed to keep the yuan low relative to the U.S. dollar, and there was a dust-up earlier this year when U.S. Treasury secretary Timothy Geithner criticized Chinese currency policy. "Chinese intervention in [foreign] exchange markets has the same effect on the relative price of Chinese and American goods as a tariff does," Wharton finance professor Richard Marston said in the article. "And this intervention has been huge. China has accumulated more than $2 trillion in foreign exchange reserves in part because the country has not allowed its currency to appreciate sufficiently."

After Geithner's statement, the U.S. government, mindful of its dependence on China to finance much of President Obama's stimulus plan, has backed off its currency complaints, and urged other nations to do the same. In February, Secretary of State Hillary Clinton traveled to Beijing and urged the Chinese to continue buying U.S. debt. “We are truly going to rise or fall together,” Clinton said. “By continuing to support American treasury instruments, the Chinese are recognizing that interconnection."

Fewer Billionaires on Forbes' Richest List

One trillion, four-hundred billion dollars vanished over the past year -- at least on paper -- from the aggregated wealth of the world's shrinking population of billionaires, according to an annual list of such fortunate souls compiled by Forbes. The list is smaller this year, by about 30%. The 2008 list had 1,125 billionaires. The new list has just 793 -- including 33 who tied for last place.

There are, perhaps, a billion ways to slice and dice the list. Examples: New York now has more billionaires than Moscow; Bill Gates displaced Warren Buffett in the number-one position. But the most interesting thing about the list, according to the Financial Times' Alphaville blog, is how much was lost by some of the individual billionaires. Says the blog, citing Forbes figures, "...the biggest loser - who still managed to make the list -- is Anil Ambani, owner of India’s Reliance Infrastructure, who ... lost a cool $32 [billion]. Then comes Indian steel magnate Lakshmi Mittal, at No. 8, who lost $25.7 [billion] during the past year  [billion] reducing his wealth to just $3.5 [billion]."

To be sure, it's been a tough year, and the 2010 list seems likely to show more losses and fewer billionaires. Still, many of these wealthy folks are probably having serious chats with their SFOs -- Single Family Offices -- which, as a Knowledge@Wharton article reported last spring, play an essential role in the investment strategies of the world's wealthiest families.

Advice for billionaires: Managing Your Wealth in an Age of Uncertainty

Many Banks Say 'No Thanks' to Rescue Funds with Policy Strings

Having found themselves in a fine mess thanks to their exposure to securitized sub prime credit, U.S. banks large and small signed on for billions in bailout funds through the Treasury Department's Troubled Asset Relief Program. Now some of those banks are declining the funds and even asking where they can return money they've already received. Why? According to a New York Times report today, the bankers are unhappy with the strings attached to the bailout bucks.

The newspaper says that "financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises,and withdraw job offers to foreign citizens."

Noting the mortgage modification requirements, a Brookings Institution economics fellow, Douglas J. Elliott, told The Times: “I honestly believe the people in power pushing this policy see it as a win-win -- as something that is good for the banking industry and good for homeowners and others. But there is a slippery slope and there are potentially significant negative consequences.”

An Economist magazine blog, Free Exchange, also noted those consequences. "Foes of [bank] nationalisation, take note -- the government is likely to tend to banks under its control with a heavy hand." It adds, tongue-in-cheek, apparently: "Just as we feared! The government would begin focusing on its priorities rather than returning the banks to profitability. On the other hand, maybe the government is interventionist like a fox."

That fox-like wisdom was noted recently by Wharton real estate professor Susan M. Wachter in a KnowledgeToday post. Some banks, she said, might voluntarily participate in mortgage modification initiatives -- a key part of President Obama's foreclosure relief plan -- just to avoid being forced to take TARP funds and the other strings they bring. Banks which do not participate in the plan may be more likely to become subjects of the government's "stress tests" -- reviews of their solvency required by Treasure Department. Banks failing the test could be declared insolvent or be forced to accept a TARP cash infusion. "So the question that non-participating banks have to ask themselves is, 'Do I want to be first in line for a stress test?'"

Fed Chairman Bernanke Offers a Four-point Strategy for a New Regulatory Framework

Federal Reserve Chairman Ben S. Bernanke called for a broad reworking of regulations governing the financial system to guard against catastrophic meltdowns like the one that has hobbled the global economy since late 2007. In remarks (full text) today before the Council on Foreign Relations in Washington, D.C., the Fed chairman said: "We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim."

Bernanke then identified four key elements for such a strategy: "First, we must address the problem of financial institutions that are deemed too big -- or perhaps too interconnected -- to fail. Second, we must strengthen what I will call the financial infrastructure -- the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets -- to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not ... overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing."

Wharton faculty and other experts whose ideas have appeared in Knowledge@Wharton have offered similar suggestions for regulatory reform in the aftermath of the worst financial collapse since the Great Depression. For example, just as Bernanke called for a "holistic" approach to fixing the regulatory framework, Wharton finance professor Richard Marston told Knowledge at Wharton: "We'll have to start from scratch again and think about how we regulate finance and allow it to thrive, and not take undue risk which society as a whole has to pay for. It's a balancing act. Everything is on the table." In that same article, titled, "Getting It Right: Making the Most of an Opportunity to Update Market Regulation," Wharton finance professor Marshall Blume spoke to Bernanke's concern about systemic risk: "We have centralized oversight of systemic risk; however, I don't believe the Fed has the tools necessary to do an adequate job there." Wharton faculty have also addressed post-crisis regulatory reform in Knowledge@Wharton articles including: "CEOs and Market Woes: Is Poor Corporate Governance to Blame?"

For an archive of Knowledge@Wharton's continuing coverage of the financial crisis, see: "Wall Street's Day of Reckoning: What's Next?"