MU Expert Warns of a Conflict of Interest If Bailout Is Implemented
Sept. 24, 2008
COLUMBIA, Mo. – As the U.S. Congress debates the details of a financial market bailout that could cost American taxpayers anywhere from $100 million to $1 trillion, political leaders have started to express concern of the oversight of the bailout. A University of Missouri expert warns that although the bailout is necessary to restore confidence and liquidity to the markets, taxpayers should pay careful attention to any conflict of interest when the bailout is implemented.
“One of things that taxpayers are going to have to watch for is the oversight of the bailout,” said Karen A. Schnatterly, assistant professor of management in MU’s Robert J. Trulaske Sr. College of Business. “Right now the only people who understand the assets are the people who created the assets. The people who will be in charge of every step of the bailout - identifying the assets, valuing the assets and selling the assets - are likely to be former investment bank employees.”
Schnatterly believes that this financial crisis and the fall of free-standing investment banks, such as Lehman Brothers and Merrill Lynch, may only temporarily suspend high-risk investments.
“As of Monday, there are no more stand-alone investment banks,” Schnatterly said. “What are left are enormous financial institutions that, as bank holding companies, are required to take less risk. As a result, former investment bankers will see less extreme payback as employees in these organizations. Unfortunately, greed is a perpetual human condition, and these new employees of bank holding companies may not be happy receiving lower annual compensation. They have three alternatives: 1) accept a lower salary and be happy they have a job, 2) move to a new job or 3) begin to figure out how to take high risks in a new way in the bank holding companies.”
After the bailout, Schnatterly predicts an increase in entrepreneurial activity in the financial sector and a concentration of activity in substitute, high-risk entities, such as privately managed investment funds, hedge funds and smaller, regional investment firms. High-risk investments will likely move to these smaller firms, Schnatterly said.
Schnatterly is a member of the Academy of Management and the Strategic Management Society. Her teaching and research interests include white collar crime, boards of directors and institutional owners. She has been published in the Strategic Management Journal and the Financial Times and has authored several book chapters.