As a former banker with 18 years experience, this article is 100% on the ball. Having worked as a senior executive during the times of Global Crossing and Enron I saw how the system was gamed!.
Working at this large institution I saw how the bonus system, made the supposedly senior bankers act like a group of Mary Kay cosmetic sales girls, seeing how they could optimize their bonuses by playing the game, and how they got the lower levels of the pyramid to play along because of the partial subjectivity and discretionary aspect of the bonus system. Because of this discretionary aspect, lower levels of the pyramid, we're unlikely to question the creation of complex and funky new products specifically designed to overcome impediments to maximize that short term bonus.
When this giant "ponzi" scheme began to collapse, I saw how those same greedy senior executives proceeded to panic and destroy significant strategic parts of the business solely to stop the leakage of their bonus pool and try and cosmetically dress up the banks short term results to justify and maintain those 6-8 figure bonuses they had thought they were going to receive.
Many of these executives later "resigned" or were "retired" by their boards who should have been accountable for the damage reaped by these masters of gaming. Most of them(I think all of them!) retained huge bonuses all at the expense of the shareholders and employees. Writing off 100's of millions of $ of shareholder and depositor value. With middle class retail shareholders, depositors, and employees paying the price of this borderline criminal behavior.
Most galling to me is that one of these executive used some of his "hard owned bonus" to have a faculty/ building at my alma mater named after him. I believe this was probably more driven by ego than guilt!
Nassim is 100% on the ball. Nothing has really changed and history repeats itself, and unless government starts to listen then I fear the outcome will either be financial collapse or revolution (#occupywallstreet?).
It seems to me the problem is that bankers have gotten very good at passing risk onto other parties. And other parties have been behaving in incredibly stupid ways. You can't fix stupid, so how do you prevent banks from separating risk from return?
And if bankers are not providing adequate returns, should this not be the responsibly of their shareholders to fix?
But boards have failed their shareholders. You can't fix stupid, again.
Those are the systemic problems in banking - separation of risk from reward and corrupt corporate leadership. Any regulation should be aimed at fixing those problems. I don't see where compensation structure comes into it at all. It's a symptom, not a cause. If people can make huge amounts of money, they will. That money has to go somewhere. And good on the bankers for making it- so long as they don't ruin it for the rest of us. Making sure they don't ruin it for the rest of us is the thing the government needs to concentrate on.
But the government is dumber than the bankers. You can't fix stupid- part three.
I believe the main problem is not the bonus and the risk taking that it causes, the problem is the structure of the bonus and the type of risk taking we see as a result. It should rather resemble long term share option or recurring commission schemes. There are many other good long term risk reward schemes in mature industries that work, and these could apply to investment banks. Just because the item being traded has a short life doesn't mean the incentive should be short term. This is because long term products in the system rely on it, as we've been seeing.
This is essentially a structure the banks has to solve themselves to remain in business, and if they actually went bust and weren't bailed out it would have been solved already. Instead they were bailed out because of the potential effects on the rest of the economy, but that has delayed reform within the banks themselves.
The problem is the governments work on a similar incentive structure, where their reward is winning the next election. They bailed out the banks because of the short term reward of avoiding short term pain. Now sovereign debt is being traded by the same banks in the same way through the same type of complex derivatives with the same type of guarantees from the governments as we had with bad CDOs before.
In Europe they're creating a bailout mechanism that resembles a super CDO. This is creating bonuses for bankers in the short term. The best I can hope for is that this will cause a gradual devaluation of the Euro and not another shock like we had in 2008.
As publicly traded companies (eg. Goldman, Morgan Stanley), don't the executives have legal obligations towards the shareholders? Isn't it illegal for them to game the rules to maximize their bonuses at the expense of the company's long-term viability? Why don't the shareholders fire these guys out of simple self-interest to protect the value of the stock they're holding?
If I were the owner of a company and the CEO I hired to run it for me were to put my company at risk for his bonuses I'd be hitting my head against the wall and firing him. No gov't regulation required.
Yeah, the model is broken, but what do we do? Bail out the model. We shouldn't outlaw the model. We should let the stupid models fail and be replaced by smarter, more accurate, more legit models.
What really gets me cooking is that to this day, nobody has been put in jail or has been responsible for all that has happened... it was just shrugged off and the consequences were dealt with by dishing out loads of money.
How this is even possible boggles the mind. If you steal a few bucks or cheat on taxes as the average working guy, you will get fucked by the system harder than all hell... but these financial giants get away with fucking the whole system in each and every way.
I love hacker news for discussions about business and about learning about how the smartest programmers in the world think about programming.
When articles that deal with the world outside of startup finance appear on Hacker News, the articles and comments usually have so little knowledge behind them they are practically unreadable.
It would be nice if this community could keep the articles they post based on VC funding, angel funding, debt funding for start ups, option pools, etc.
The comments here are more representative of political ideals and not based on facts.
(Also, I understand that is not entirely true as some comments are actually quit interesting, but I have to wade through so much garbage to find them that it isn't worth it.)
When articles that deal with the world outside of startup finance appear on Hacker News, the articles and comments usually have so little knowledge behind them they are practically unreadable.
Sometimes these issues just don't require that much knowledge to understand, though, and I think this is one of those.
When upside returns are based on a percentage of your winnings, and downside is limited to the loss of a job, at worst, the course of action is clear: shoot the moon, take on as much risk as you possibly can. Push the rules as far as they'll go to crank up the variance of your returns, and half the time, it'll pay off.
There are no subtleties here, no deep knowledge of banking required to see what's wrong with this picture. I'll agree that finding a solution might be tricky, but the fundamental problem has nothing whatsoever to do with politics, it's simple arithmetic.
Hell, even the people that benefit from these sort of incentive schemes - they're most definitely not a stupid lot, if you've ever interacted with them! - tend to think that they're crazy, they agree that what's good for them personally tends to be bad for their companies, and bad for the economy at large. But being fairly rational decision makers, they optimize for personal profit, just as most of us would if we were in their shoes.
I would tend to disagree that this article is not relevant, startup finance and access to funding for startups is highly dependent on the health of the financial system, and this article deals with the economics and the gaming of that system.
Your comment would be more helpful if you could explain why some of the garbage is based on ideals instead of facts, or provide your own facts. I'm not saying this to support the so-called garbage, but because I am about as unqualified a consumer as anyone of "comments on op-eds that address banking regulation", and maybe you could sift the wheat from the chaff for people like me.
The normal critical thought displayed by HNers seems to evaporate when the subject is politics or finance. Post titles that would otherwise be called link-bait, like "Goldman Sachs has engineered every US crisis" and "investment banks have caused world famine" (paraphrasing the title of 2 recent posts), are accepted as truth. Another example is any post dealing with HFT.
Subjectively, these discussions appear to have a lot more of downvoted (grayed out) comments. Either they're bad comments, or they're reasonable comments that are downvoted for going against the "hivemind". In either case, it's a bad sign.
This sort of post, while interesting, should be treated as articles about electoral politics and hence off-topic. But the only apparent solution is via moderation.
It does not take a wallstreet genius to understand "too big to fail" and that huge amounts of bailout were payed for nothing in return. Nobody had to answer for what happened and things went right back to business-as-usual.
This sounds like we're tackling a symptom not the disease. Instead of figuring out how to stop bankers from being paid so much in bonuses, we should answer ask why a few times.
"Why can banks pay their employees so much?" - because they make so much money, and have so few employees.
"Why can banks make so much money?" - I'm not sure but it seems like banks can take risks, but pass off the real risk to others.
"Why can banks take risks, but not have to worry about the downside of those risks" - ...
I think if you follow that train of thinking you'll get to some structural problem in our current system. It doesn't seem like there is an easy fix here.
It sounds like you're responding to the headline and not the article. Taleb didn't say anything about bankers being paid too much (or "so much"). His argument was that bonuses encourage risk taking and that having bank compensation be less variable (i.e. base salary would go up, but not fluctuate) would lead to less risk taking.
Did you read the article? Taleb was arguing against bonuses as incentives to take risk, without corresponding downsides. He was not arguing against bankers being paid lots of money.
There's a problem with the "go back in time" policy proposals. If the banks beat the regulations we had in place before, what makes us think they won't beat them again?
This is why Taleb is proposing a simpler solution - it might be hard to get around.
I am skeptical of all proposals, but I think it's important to understand that going back to the previous set of regs might not work since the banks busted through those.
Actually, if we move all our money from big banks to credit unions and small local banks, the end result will be the same as re-introducing Glass-Steagall act.
I do like this idea, but I'm a bit skeptical that a relic of the 1930s would work in our modern economy. Thus, I suspect the answer is a bit more complex than "Bring back Glass-Steagall".
Another option is for banking (of the high risk investment banking kind) to be conducted by partnerships, with only natural persons as members, rather than corporations. One's ownership would be long-term, and actions could claw back previous upside.
Goldman Sachs was a partnership until its IPO in 1999. A lot of finance houses were closely held partnerships until the late 20th century.
That would work if we wanted to stop banks from transferring losses to shareholders - the real problem is that they transfer losses to taxpayers. Pre-IPO Goldman Sachs was probably considered "systemically important" enough for their losses to have been covered in the event of a large trading loss.
I think a better solution for "too big to fail" banks would be to require bonuses are paid in restricted stock. That way if the bank needs a bailout, then bonuses would be automatically clawed back. The bigger the bank, the larger the portion that is required to be RSUs. This would give a recruitment advantage to smaller banks, thus serve as an automatic limiter to bank size.
That's already very common practice, and unfortunately it's not very effective. Bear Stearns was 30% employee owned [1], and Lehman was 25% employee owned [2]. All that stock became worthless when the firms blew up.
An even better solution would be to just allow the market to take its course. Thinking up ways to allow to big too fail institutions to keep existing is counterproductive. Just allow it to fail and people will stop doing those things. If your bank doesn't exist you can't very well collect a bonus from it.
I bet you if the big money families started losing big chunks of their fortunes that there would be serious reform. Same with retirees and their pensions.
How do you think the prosecution of bankers would go if bankers put the DOJ pension at risk?
This is absurd. Regulating private companies' compensation? Instead, the government should either make sure companies don't get "too big to fail", or make it very clear that banks don't have the Geithner Put option.
>> I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.
I'm sorry but that's not the solution.
The solution is for the government to stop bailing out private institutions, regardless of whether they are deemed "too big to fail."
There are some incredibly elegant natural laws built into the fabric of the universe, one of which is expressed through economic systems in which corrupt, reckless institutions are eliminated because they go broke.
The only way corrupt, reckless institutions are allowed to persist are when they are propped up by taxpayer money.
There are plenty of fine ways of reducing risk for companies which pose a systemic threat the US economy, eliminating bonuses is probably not one of them.
The most obvious is, if a company ever becomes Too Big To Fail, you simply force them to break up. We do this with monopolies because they could harm competition. We have plenty of experience with it. Surely we could do it with companies that represent a massive threat to our economy.
The second one I see is to force any Too Big To Fail company to hold a very large percentage of their value in a bond they hold with the government. Now, they could be a standard federal bond or a special insurance bond, but it would basically mean that if the sh*t hit the fan, there would be enough company assets in safe holding to fail in a more controlled manner.
This fails because it ignores the root cause. All banking crises are informational in nature. Circulating more of the right kind of information is nearly all the regulation you need. What information? Positions, live or daily, in detail. No more too big to fail, and many other problems simply disappear.
In contrast, most regulatory proposals betray a belief in installing a tough cop of some kind to combat 'evildoers'. Guess what, the evildoers are just people doing their jobs. We need to tweak the system to stabilize it, and for a regulated industry like banking the government has all the power it needs to do so.
> The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls.
What about myopia, self-delusion, panic, sheer intellectual dishonesty or even disability, and all the other assorted biases that afflict human judgment? Humans hurt themselves all the time. In fact, there are instances when putting more pressure or increasing the (financial) incentives hurts performance and increases risk.
> I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.
Having said that, I'm still all for the use and (re?)discovery of heuristics in regulation, combined with judgment on the part of the enforcer. It's high time we moved past the game of who can outlawyer who. There is a reason that posts like yesterday's knife maker capture the attention of many people these days and why firms like Apple or Leica are so successful these days. Life is becoming so complex, we can't write every contingency into a law; so much is becoming possible today that we need more and more conscious, i.e. editorial constraint.
The problem that Taleb unfortunately doesn't address is that the bankers have captured the political system. For this reason his solution unlikely to transpire.
I like the general idea of linking the consequences of some actions to the actors involved to prevent cheating and bad behavior. The examples from Babylon and Rome were probably much more effective in this than cutting the bonus of a banker (ie they paid with their lives).
I had a similar thought when I started reading about fracking (http://www.propublica.org/series/fracking). A simple solution there for the pollution caused by the wastewater is to force the executives and their families from the companies doing fracking to live in the communities they affect and use/drink the water they claim is safe.
Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.
I'd really like to see someone attempt to express such a condition in the type of legalese that appears in legislation.
How do you ban something based on a hypothetical possibility? How do you write this condition down?
>The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster.
I think this claim contains a pretty elementary mistake. No bonus is a disincentive, because base salaries can be relatively low; not receiving a bonus is a large opportunity cost. If I could get a 400k salary, but I instead opt for a 200k salary with a 400k expected bonus, then if I don't get my bonus I'm 200k behind where I could have been if I just took the salary.
This is true, but the downside is capped: a bonus can't go below zero. Thus traders may become insensitive to the amount of money they lose and thus increase risk.
You miss the point. It's possible to make huge returns on risky investments and get paid huge bonuses for several years until the investment fails. The the worst that happens is that you don't collect your bonus that year.
I agree. The real problem he's describing is the bonuses reward short term success regardless of the long term risks. Bank shareholders who are long term investors should demand bonuses that incent long term success, rather than short term.
>I think this claim contains a pretty elementary mistake. No bonus is a disincentive, because base salaries can be relatively low; not receiving a bonus is a large opportunity cost. If I could get a 400k salary, but I instead opt for a 200k salary with a 400k expected bonus, then if I don't get my bonus I'm 200k behind where I could have been if I just took the salary
Say my bonus is, I dunno, 2% of profits.
I go put 100 billion dollars on a single hand of blackjack. If I win, I make 2 billion. If I lose, I'm out 400k. Easy choice. Do it!
The Black Swan is an interesting book. You might disagree with Taleb's claims, but he's not making elementary mistakes.
Suppose there is a bet that has an 80% chance of success (a payout of 100), but a 20% chance of catastrophic failure (a loss of 500, which results in a bail-out). On average, this bet loses 20; it should not be made at all.
But suppose you make a bonus of 20% of your gains, and no bonus for losses. Would you make this bet? Is opportunity cost a sufficient disincentive, or is that an elementary mistake, since the expected return seems to be 16?
If you don't pay bonuses, do you give a managing director at a bank a 1 million dollar salary independent of performance? How is that a good thing? And if you tried to pay her very little, the bank would just turn itself into a shadow bank and proceed as before. Remember, GM was not a bank, at least nominally, and it was bailed out
I think strict regulation is the way to go. Banking in a modern economy is really a utility like gas, electric, and water.
Another solution that is more long term oriented and market based: create rival capital-formation pools outside of Wall and Broad, say in the Midwest, South, and West Coast. That way if one pool blows up, we can let them fail and it won't take out the whole economy. It also removes single points of failure from the system. I think the crowdsourcing bill floating in Congress is a great start as it decentralizes capital-raising.
The real solution is to either disintermediate the banks or eat away at their profits. LendingClub, Covestor, SecondMarket, Simple, Square, WePay, and Mint come to mind.
The fundamental problem is that when a corporation has so much money they can throw tons of it at the upper management and executive, and not go out of business because they are undercut by a competitor that doesn't waste money like that, then something is wrong with capitalism at that point. That is the problem you try to fix, you don't just throw more regulation on the banks that will backfire like software patents.
[+] [-] Dbkasia|14 years ago|reply
Working at this large institution I saw how the bonus system, made the supposedly senior bankers act like a group of Mary Kay cosmetic sales girls, seeing how they could optimize their bonuses by playing the game, and how they got the lower levels of the pyramid to play along because of the partial subjectivity and discretionary aspect of the bonus system. Because of this discretionary aspect, lower levels of the pyramid, we're unlikely to question the creation of complex and funky new products specifically designed to overcome impediments to maximize that short term bonus.
When this giant "ponzi" scheme began to collapse, I saw how those same greedy senior executives proceeded to panic and destroy significant strategic parts of the business solely to stop the leakage of their bonus pool and try and cosmetically dress up the banks short term results to justify and maintain those 6-8 figure bonuses they had thought they were going to receive.
Many of these executives later "resigned" or were "retired" by their boards who should have been accountable for the damage reaped by these masters of gaming. Most of them(I think all of them!) retained huge bonuses all at the expense of the shareholders and employees. Writing off 100's of millions of $ of shareholder and depositor value. With middle class retail shareholders, depositors, and employees paying the price of this borderline criminal behavior.
Most galling to me is that one of these executive used some of his "hard owned bonus" to have a faculty/ building at my alma mater named after him. I believe this was probably more driven by ego than guilt!
Nassim is 100% on the ball. Nothing has really changed and history repeats itself, and unless government starts to listen then I fear the outcome will either be financial collapse or revolution (#occupywallstreet?).
[+] [-] damoncali|14 years ago|reply
And if bankers are not providing adequate returns, should this not be the responsibly of their shareholders to fix?
But boards have failed their shareholders. You can't fix stupid, again.
Those are the systemic problems in banking - separation of risk from reward and corrupt corporate leadership. Any regulation should be aimed at fixing those problems. I don't see where compensation structure comes into it at all. It's a symptom, not a cause. If people can make huge amounts of money, they will. That money has to go somewhere. And good on the bankers for making it- so long as they don't ruin it for the rest of us. Making sure they don't ruin it for the rest of us is the thing the government needs to concentrate on.
But the government is dumber than the bankers. You can't fix stupid- part three.
Maybe it's hopeless.
[+] [-] kokey|14 years ago|reply
This is essentially a structure the banks has to solve themselves to remain in business, and if they actually went bust and weren't bailed out it would have been solved already. Instead they were bailed out because of the potential effects on the rest of the economy, but that has delayed reform within the banks themselves.
The problem is the governments work on a similar incentive structure, where their reward is winning the next election. They bailed out the banks because of the short term reward of avoiding short term pain. Now sovereign debt is being traded by the same banks in the same way through the same type of complex derivatives with the same type of guarantees from the governments as we had with bad CDOs before.
In Europe they're creating a bailout mechanism that resembles a super CDO. This is creating bonuses for bankers in the short term. The best I can hope for is that this will cause a gradual devaluation of the Euro and not another shock like we had in 2008.
[+] [-] adamtmca|14 years ago|reply
[+] [-] Maro|14 years ago|reply
If I were the owner of a company and the CEO I hired to run it for me were to put my company at risk for his bonuses I'd be hitting my head against the wall and firing him. No gov't regulation required.
[+] [-] coreyo|14 years ago|reply
[+] [-] kahawe|14 years ago|reply
How this is even possible boggles the mind. If you steal a few bucks or cheat on taxes as the average working guy, you will get fucked by the system harder than all hell... but these financial giants get away with fucking the whole system in each and every way.
[+] [-] wtvanhest|14 years ago|reply
When articles that deal with the world outside of startup finance appear on Hacker News, the articles and comments usually have so little knowledge behind them they are practically unreadable.
It would be nice if this community could keep the articles they post based on VC funding, angel funding, debt funding for start ups, option pools, etc.
The comments here are more representative of political ideals and not based on facts.
(Also, I understand that is not entirely true as some comments are actually quit interesting, but I have to wade through so much garbage to find them that it isn't worth it.)
[+] [-] bermanoid|14 years ago|reply
Sometimes these issues just don't require that much knowledge to understand, though, and I think this is one of those.
When upside returns are based on a percentage of your winnings, and downside is limited to the loss of a job, at worst, the course of action is clear: shoot the moon, take on as much risk as you possibly can. Push the rules as far as they'll go to crank up the variance of your returns, and half the time, it'll pay off.
There are no subtleties here, no deep knowledge of banking required to see what's wrong with this picture. I'll agree that finding a solution might be tricky, but the fundamental problem has nothing whatsoever to do with politics, it's simple arithmetic.
Hell, even the people that benefit from these sort of incentive schemes - they're most definitely not a stupid lot, if you've ever interacted with them! - tend to think that they're crazy, they agree that what's good for them personally tends to be bad for their companies, and bad for the economy at large. But being fairly rational decision makers, they optimize for personal profit, just as most of us would if we were in their shoes.
[+] [-] Dbkasia|14 years ago|reply
[+] [-] spacemanaki|14 years ago|reply
[+] [-] nandemo|14 years ago|reply
The normal critical thought displayed by HNers seems to evaporate when the subject is politics or finance. Post titles that would otherwise be called link-bait, like "Goldman Sachs has engineered every US crisis" and "investment banks have caused world famine" (paraphrasing the title of 2 recent posts), are accepted as truth. Another example is any post dealing with HFT.
Subjectively, these discussions appear to have a lot more of downvoted (grayed out) comments. Either they're bad comments, or they're reasonable comments that are downvoted for going against the "hivemind". In either case, it's a bad sign.
This sort of post, while interesting, should be treated as articles about electoral politics and hence off-topic. But the only apparent solution is via moderation.
[+] [-] joelmichael|14 years ago|reply
[+] [-] kahawe|14 years ago|reply
Or what do you make of it?
[+] [-] wsetchell|14 years ago|reply
"Why can banks pay their employees so much?" - because they make so much money, and have so few employees.
"Why can banks make so much money?" - I'm not sure but it seems like banks can take risks, but pass off the real risk to others.
"Why can banks take risks, but not have to worry about the downside of those risks" - ...
I think if you follow that train of thinking you'll get to some structural problem in our current system. It doesn't seem like there is an easy fix here.
[+] [-] albertsun|14 years ago|reply
[+] [-] rhizome|14 years ago|reply
[+] [-] nickik|14 years ago|reply
1) Don't save them and make sure the understand that.
2) Take them you of the money creation process.
3) Stable Money (Gold is an example or something like bitcoin (an algorithem))
[+] [-] barrkel|14 years ago|reply
[+] [-] RyanMcGreal|14 years ago|reply
[+] [-] tryitnow|14 years ago|reply
This is why Taleb is proposing a simpler solution - it might be hard to get around.
I am skeptical of all proposals, but I think it's important to understand that going back to the previous set of regs might not work since the banks busted through those.
[+] [-] othermaciej|14 years ago|reply
[+] [-] sdizdar|14 years ago|reply
[+] [-] j_baker|14 years ago|reply
[+] [-] rdl|14 years ago|reply
Goldman Sachs was a partnership until its IPO in 1999. A lot of finance houses were closely held partnerships until the late 20th century.
[+] [-] flourpower|14 years ago|reply
[+] [-] jcampbell1|14 years ago|reply
[+] [-] ctkrohn|14 years ago|reply
[1] http://www.nceo.org/main/column.php/id/282 [2] http://online.wsj.com/article/SB122117966831526067.html
[+] [-] fleitz|14 years ago|reply
I bet you if the big money families started losing big chunks of their fortunes that there would be serious reform. Same with retirees and their pensions.
How do you think the prosecution of bankers would go if bankers put the DOJ pension at risk?
[+] [-] ihodes|14 years ago|reply
Simple and unobtrusive.
[+] [-] jwallaceparker|14 years ago|reply
I'm sorry but that's not the solution.
The solution is for the government to stop bailing out private institutions, regardless of whether they are deemed "too big to fail."
There are some incredibly elegant natural laws built into the fabric of the universe, one of which is expressed through economic systems in which corrupt, reckless institutions are eliminated because they go broke.
The only way corrupt, reckless institutions are allowed to persist are when they are propped up by taxpayer money.
[+] [-] Aloisius|14 years ago|reply
The most obvious is, if a company ever becomes Too Big To Fail, you simply force them to break up. We do this with monopolies because they could harm competition. We have plenty of experience with it. Surely we could do it with companies that represent a massive threat to our economy.
The second one I see is to force any Too Big To Fail company to hold a very large percentage of their value in a bond they hold with the government. Now, they could be a standard federal bond or a special insurance bond, but it would basically mean that if the sh*t hit the fan, there would be enough company assets in safe holding to fail in a more controlled manner.
[+] [-] anamax|14 years ago|reply
Surely that also applies to GSEs (such as Fannie Mae and Freddie Mac), govt programs, and even govts themselves.
If not, why not?
[+] [-] T_S_|14 years ago|reply
In contrast, most regulatory proposals betray a belief in installing a tough cop of some kind to combat 'evildoers'. Guess what, the evildoers are just people doing their jobs. We need to tweak the system to stabilize it, and for a regulated industry like banking the government has all the power it needs to do so.
[+] [-] HSO|14 years ago|reply
> The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls.
What about myopia, self-delusion, panic, sheer intellectual dishonesty or even disability, and all the other assorted biases that afflict human judgment? Humans hurt themselves all the time. In fact, there are instances when putting more pressure or increasing the (financial) incentives hurts performance and increases risk.
> I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.
Having said that, I'm still all for the use and (re?)discovery of heuristics in regulation, combined with judgment on the part of the enforcer. It's high time we moved past the game of who can outlawyer who. There is a reason that posts like yesterday's knife maker capture the attention of many people these days and why firms like Apple or Leica are so successful these days. Life is becoming so complex, we can't write every contingency into a law; so much is becoming possible today that we need more and more conscious, i.e. editorial constraint.
[+] [-] gallerytungsten|14 years ago|reply
[+] [-] uwe|14 years ago|reply
I had a similar thought when I started reading about fracking (http://www.propublica.org/series/fracking). A simple solution there for the pollution caused by the wastewater is to force the executives and their families from the companies doing fracking to live in the communities they affect and use/drink the water they claim is safe.
[+] [-] brown9-2|14 years ago|reply
I'd really like to see someone attempt to express such a condition in the type of legalese that appears in legislation.
How do you ban something based on a hypothetical possibility? How do you write this condition down?
[+] [-] endtime|14 years ago|reply
I think this claim contains a pretty elementary mistake. No bonus is a disincentive, because base salaries can be relatively low; not receiving a bonus is a large opportunity cost. If I could get a 400k salary, but I instead opt for a 200k salary with a 400k expected bonus, then if I don't get my bonus I'm 200k behind where I could have been if I just took the salary.
[+] [-] wmf|14 years ago|reply
[+] [-] weeksie|14 years ago|reply
[+] [-] dminor|14 years ago|reply
[+] [-] kevinpet|14 years ago|reply
[+] [-] KVFinn|14 years ago|reply
Say my bonus is, I dunno, 2% of profits.
I go put 100 billion dollars on a single hand of blackjack. If I win, I make 2 billion. If I lose, I'm out 400k. Easy choice. Do it!
The Black Swan is an interesting book. You might disagree with Taleb's claims, but he's not making elementary mistakes.
[+] [-] barrkel|14 years ago|reply
But suppose you make a bonus of 20% of your gains, and no bonus for losses. Would you make this bet? Is opportunity cost a sufficient disincentive, or is that an elementary mistake, since the expected return seems to be 16?
[+] [-] MKT|14 years ago|reply
[+] [-] mbesto|14 years ago|reply
Michael Lewis - Liar's Poker
http://www.amazon.com/Liars-Poker-Michael-Lewis/dp/039333869...
[+] [-] 3d3mon|14 years ago|reply
Another solution that is more long term oriented and market based: create rival capital-formation pools outside of Wall and Broad, say in the Midwest, South, and West Coast. That way if one pool blows up, we can let them fail and it won't take out the whole economy. It also removes single points of failure from the system. I think the crowdsourcing bill floating in Congress is a great start as it decentralizes capital-raising.
[+] [-] pkaler|14 years ago|reply
[+] [-] zanny|14 years ago|reply