Debt Solution Tips

Yacht brokers and Maybach salesmen cracked open the champagne this weekend after investors roared back into the stock markets Thursday and Friday.

But the U.S. government's vast - and still amorphous - bailout of the financial sector will not,signal a return to business as usual. For the financial-services industry, the era of vast profits, huge salaries, stunning bonuses, lavish benefits and platinum handshakes just came to a sudden end. That's the price the industry must now pay for its indiscipline.

The bailout is deeply unfortunate but even more deeply essential. The underpinnings of the global financial system were beginning to creak and rattle as the crisis-of-confidence turmoil grew. Washington owed it to the whole world to prevent the cancer of failed confidence from metastasizing any farther. The U.S. financial sector truly is too big to be allowed to fail.

If you take a financial risk, you deserve to cash in if things work out, but ought to pay the price if they don't. When there's no downside to a venture, why not go big? So what if it's a long shot? Uncle Sam will pay if you lose!

The financial services industry in the U.S. has enjoyed a breathtaking boom for many years, but now the party is over. The industry that emerges from this shakeup, and from what will likely amount to a sort of temporary partial nationalization, will need to be quite different.

But cries for "more regulation" are by themselves not helpful. The industry has a long history of taking care of itself first, despite successive waves of regulatory fervour and reform. As long ago as 1940, a man named Fred Schwed wrote a book about this, called Where Are the Customers' Yachts? The title makes the point.

Still, greed is part of human nature; the real policy challenge is not to outlaw greed, but to harness it so that it becomes responsible diligence. Policy decisions - capital requirements for banks, lending standards and other controls on the sector - will have to be made tougher and be enforced fully. And individual investors, we can hope, will by now have learned that if you can't understand it then you shouldn't invest in it. (What is a synthetic collateralized debt obligation, anyway?)

But no amount of new regulation will revive moral hazard. The top executives of financial firms, such as Dick Fuld of Lehman Brothers, are walking away from this shambles unpenalized. The government and the industry need to look hard at ways of instilling disciplined prudence at the top of the corporate pyramid.