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End Bonuses For Bankers
theodp writes "NYU risk engineering prof Nassim Nicholas Taleb has a suggestion that won't sit too well with the banksters. In his NY Times op-ed, Taleb writes: 'I have a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.' The problem with the bonus system, Taleb explains, is that it provides an incentive to take risks: '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. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.'"
bankers will still upset the market on purpose for bribes, much like how politicians lie to (and upset) voters because of what amounts to bribery....
This is a fundamental property of capitalism: when a corporation gets lucky it can cash in and when it gets unlucky just go bankrupt.
Bonus in government is even worse.
This isn't a solution until he first figures out how to get this by the politicians that said bankers have bought with said money.
"why didn't anyone think of this before" things.
After all, banking isn't really an "industry" in the sense that the word is used in relation to other industries. What does the banking "industry" produce? Money? (In the form of deposits when they make loans?)
How do you increase productivity? More loans per bank employee?
Ideally, banking is supposed to be a support process, not a growth industry in itself. So, yeah, it seems to make sense not to give bonuses to bankers.
I'm not a lawyer, but I play one on the Internet. Blog
If the problem is no corresponding disincentive for failure, it doesn't make sense to remove the incentive for success.
Instead, should unwarranted bonuses be given that later turn out to be fraudulent, the bonuses should be clawed back. Perhaps add a penalty of 50% of the bonus on top of clawing back the full bonus.
:(){
How about if a corporation is awarded death penalty, all its assets would be sold,the proceeds will be distributed to the shareholders, the corporations name, ticker symbols and other trade marks will be sequestered for ever?
It is far too easy to create corporations, compared to real human beings. Corporations do not require visa/green card/work permit/citizenship to work and profit inside the USA. So we can apply the lower standard of "preponderance evidence" to award death penalty to them, not the stricter "beyond reasonable doubt".
Any corporation that is too big to fail, is too dangerous to exist. They should be executed. We bailed out the financial institutions. They technically are living due to our mercy.
Let us break up any bank that has more than 10% market share in retail banking. Any investment bank that has more than 10% market share. And reinstate Glass-Stegall act. Let us do it peacefully when we still can do it in an orderly manner. Else someday roving mobs will be pulling out chairman of Goldman Sachs hiding in sewer pipes.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
Make it illegal to be an officer of a bank that goes broke. There's no reason for a bank to go out of business if the officer's have done their job right.
It doesn't take a doctor of risk engineering to figure that out. The average Joe on the street could tell you the same thing. It's easy to come up with ways to improve the banking system. Now, getting our overlords to implement them is another matter.
Sure, but also eliminate the safety of not taking risks...
You need to balance.. not tip it more one way or the other...
This would have the effect of punishing them to do anything, so they would just refuse all loans, even qualifying ones..
The money would not work in the economy, and we'd still be in the crisis, ten years from now.
We have to keep in mind the heisenberg principle, but applied to banks, it's impossible to Affect the market without unabalncing it. We(the people) ARE an actor in the market, we need to balance our action, both to help take risks, but not needlessly, nor without a plan.
This also applies to state investment, state funding, and state regulation of private investment, and state direction of private investment.
If you spend a dollar, you gotta be responsible for it.
If you spend a million, and it goes bad, do you go to jail for it?
If not...
the big question is why?
A corporation that is too big to fail is too big to have. The Justice Department spent 10 years trying to break apart Microsoft while the banks kept consolidating and getting bigger and bigger. This is a problem.
The solution isn't to eliminate bonuses, it's to send people to prison when they lie (and their lie disrupts the entire global economy, as is the case with the S&P / Moody's / Fitch ratings agencies that declared all of those worthless bonds AAA), and to not bail them out when they fail.
Again ***
The solution is to not bail them out when they fail.
Therefore, they should not be allowed to be so big that they pose a systemic risk to the entire system.
Period.
Also when a corporation is executed, all the internal contracts between the board and top executives on one hand and the corporations on the other would be null and void. Thus they don't get their golden parachutes.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
So the incentive for people to be creative, finding better ways to increase profit goes from a system of irregular rewards to one of threat? e.g. You don't make $$$ in quarter, you get the sack.
While this may be popular with the people who lost jobs or homes, plus the Occupy movement, banks probably won't go for it as psychology has determined we are more productive with irregular, but predictable (you know you'll get a bonus of you make the money) rewards.
I'd rather the change to banks be that they are not to put more than certain % at risk. I know they don't like that, but better safe and steady than another massive flop like 1929 or 2008.
A feeling of having made the same mistake before: Deja Foobar
This is news for people who hate bankers. Is it "News for Nerds" though?
BTW: I actually agree that banks should structure incentives to account for risk.
This violates the fundamental rules of capitalism. If banks want to give bonuses, then let them. Just don't subsidise them, when they are about to go bankrupt. This would be truly capitalism. Not imposing some abstract rules about how one should do his business. If bank is shitty and risky, then choose a different bank, let this one go bankrupt. Simple.
The whole economy is based on people with money giving it to other people, and getting something else back (sometimes more money).
Eliminating risk taking just means that the minimum wage guy looking for a home load won't get it.
What TFA is proposing seems to be a way to recover some of the protections lost when Glass-Steagall was repealed; specifically, don't allow retail banks like BofA and Citi to have trading floors or do investment banking.
BTW Phil Gramm seems to have an uncharacteristically low profile these days.
Why give the assets to the stock holders? Confiscate them as a fine.
'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. This violates the fundamental rules of capitalism...
The fundamental rules of make-believe capitalism. The perfect competition, perfect information world the far-right will have you believe exist. Real capitalism is what really happened. And the free market is the nirvana that currently exists in Somalia.
Totally eliminating all risks is a bad idea, because then banks will not back a lot of potentially good, but also risky ideas. It will stagnate the economy even further when only mundane ideas can get loans...
The reason you see WAY too much risk being taken is that some large banks know now the government will not let them go bankrupt. When there is no chance of failure you can shoot for the moon, so to speak.
The traditional disincentive for failure is that if you fail often enough, you'll be fired or your company will go under. You are playing with other people's money, you can only screw that up for so long - unless of course you are backed by an endless parade of government bailouts.
Look to places where regulations have indeed eliminated risks of failure and fix THAT, don't dumb down what banks are able to invest in by eliminating upside.
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Yep, corporate death penalty is the right way forward. Which is why it will never happen.
"Who is the Journal of Quantum Physics going to believe?" --Stephen Hawking
I'd go one step further. NO bank should be able to operate across state boundaries, without using a federal clearing house. Including the FED. Let's expand the FED to 50 state-run corporations. That way, no one can take down the whole country.
SJW: a person who perceives an injustice, and while correcting it, commits a greater injustice.
This changed when firms went public and came to be run by employees rather than partners, with the usual issues of agency, of which asymmetrical incentives are high on the list.
Lacking <sarcasm> tags,
Bonuses are ok.
What's really needed is a strict control over lending. The regulators should define all the requirements for a valid loan, such as who, for what purpose, required collateral, amount in relation to income etc. Failure to follow the standard loan requirements would mean that the bank would face a heavy fine or else lose Federal Deposit Insurance.
This requirement would be backed by frequent surprise audits of the loan portfolio
It won't work. Any time someone tries to pass a law making someones compensation performance-based, some union fires up the class-warfare propoganda machine and gets it voted down. I don't know if bankers have a union yet, but you can bet they will.
I'm a voracious reader. I figure I've easily read thousands of books in my life. My top ten list (hey, I'm a nerd) of most thought-provoking books I've ever read are:
10. Why Societies Need Dissent - Cass Sunstein
9. The Road to Reality - Roger Penrose
8. Diplomacy - Henry Kissenger
7. Last Chance to See - Douglas Adams
6. Free to Choose - Milton Friedman
5. Cosmos - Carl Sagan
4. Guns, Germs, and Steel - Jared Diamond
3. Black Swan - Nassim Nicholas Taleb
2. Meditations - Marcus Aurelius
1. Bible (KJV)
You are doing yourself a disservice if you don't read Taleb. He is one of those rare authors who doesn't just serve up facts, but fundamentally alters the way you see the world.
No point in alienating mutual funds and individual investors in this war. Often it is the small investor who stands to lose a $1000 investment in a bank is the one who would be most seriously fighting back. The fat cat bankers will hide behind these small investors and use them canon fodder. First cut the most egregious bad boys away from the not-so-innocent but not-so-culpable group. That is where they hide. That is the sanctuary we should deny, and the escape route we should cut off before rounding up the fat cats.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
That way, we can claw it back if their policies bankrupt a company. Also, by doing it that way, we encourage the corporations to think in longer terms -- and to structure the bonuses to pay out depending on longer term results.
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I vote we start chasing them into the sewer pipes and just save ourselves some time.
A $500,000 salary with a potential $5M bonus, a $5.5M salary with a potential "fail risk" of $5M, and a $2.5M salary with a potential bonus of $2M and a potential "fail risk" of $2M amount to the same thing.
The "risk of failure" in each is entirely in the mind of the banker - does he see his salary as "at risk": "I'll get $5.5M unless I fail to perform at the highest level" or does he see it as an opportunity to be rewarded for going beyond expectations: "I'll make $500,000, but I could make an additional $5M if I do really well."?
For the sake of argument, assume that all 3 salary options are paid out over the same period of time, have the same tax and other consequences, and are subject to identical performance or lack-of-performance measures.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Bankers aren't the working class, their the ruling class. You can't "end bonuses" for them without a major social upheaval. The trouble is those bonuses represent a major redistribution of wealth from the working class to the ruling class. The only answer that "ends bonuses" is switch the redistribution to the other direct. But when we redistribute wealth to the working classes we call that socialism. It's only capitalism when the ruling class gets the money.
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The bonuses are not what is the problem, it is the bone-headed and short-sighted triggering requirements that cause the problem.
1 million dollar bonus = Increase profit by 10% in a fiscal year = layoffs = outsourcing = switching to inferior products = false advertising = product recalls next year = class action lawsuits = declining branding = 10 years slump in sales = bankrupcy = executive doesnt care cause he was already hired by another company and is now going to buy the first company's assets for a discounted rate
Lets have better requirements like "Increase the locally employed" or "increase transparency to investors" or "negotiate a better health plan" or "be honest for a year" or "dont suck" ...
oldhack: "Security is a waste of money until shit hits the fan. 5 minutes later, it becomes waste of money again. "
Let's just hope you don't work for an "executed" corporation. You're just throwing potentially hundreds of thousands of working class people out of a job to punish the top tier - no problem with that, right?
If you can read this... 01110101 01110010 00100000 01100001 00100000 01100111 01100101 01100101 01101011
I would say: make boni AND mali if you like. Just making only Boni for an action will always imbalance the game.
"I'll believe corporations are people when Texas executes one."
I'd say the problem is not when bailouts and bonuses mix, it's when bailouts happen period.
"risk engineering prof"?
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If you provide the other end of the scale and establish a financial and career penalty system for failure up to dismissal, it should make them more aware of risk.
It's not a property of capitalism. It's a property of cronyism. I'm so sick of anti-capitalists and their Che Guevera T-shirts. What do you think the guy you bought that shirt from is?
The last thing an ego-maniacal millionaire is going to do is give up his "hard-earned" money. At some point in the wealth process money becomes the _only_ measuring stick of success. It's not that you need more, rather it's that you want more. It's like an addiction. The only way a law like this would pass is if there were a bigger payoff awaiting those who would support it.
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First solution would be to change the laws and force the banks to be just banks and not a forum for creating markets on the backs of the innocent. Allowing them to have investment capabilities under the same roof was the biggest mistake ever allowed. I still can't wrap my head around companies that are either under government control or still owe the government money for the bailouts are still delving bonuses. Talk about an egregious slap in the face.
As long as the bonus isn't paid out until the transaction is completed.
In the case of loans or loan derivatives, it means until the underlying loans are discharged.
If as a banker you book $10M in mortgages in a given year and your bank then sells them to investors.
Fine, your bonus is held in escrow based on how much of the $10M in loans have been paid off. This means you'll be collecting small bonus checks for the next 30 years. It also means if a loan goes south and the investors lose money, not only do you lose the part of your bonus related to the unpaid balance of the loan, it goes to the investors. Money-wise it will help investors only pennies on the dollar, but symbolically it's significant.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
I also notice this has the "PI" symbol for mathematics. What the fuck? This is neither math nor science, it's politics plain and simple. The yellow journalism of using the epithet 'banksters' is disgraceful. Hey, think what you want, that's OK. But don't call it science nor mathematics.
Shutting down free speech with violence isn't fighting fascism. It IS fascism!
Let government decide non-government employee pay.. What could possibly go wrong?
Yet, if they don't take risks, then their stockholders bitch about reduced profits, and their depositors bitch about reduced returns/interest on their deposits - and the money and investors move to banks that will take the risk.
Why would any bank stay in the country if we take the right to give bonuses? Also weren't most of those 'risks' that banks took mandated by the laws at the time?
You say things that offend me and I can deal with it. Can you?
I was under the impression that screwing the IRS was one of the few things that even corporate bankruptcy wouldn't cover, especially if civil or criminal fraud was involved.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
The problem is not the bonus it's that there is no actual risk, the banks lost it all and then they were bailed out.
Private profit and socialized losses is wrong, but the fix is not to eliminate the private profit, The risk needs to be real, big banks should fail when they are wrong.
It took a real world war to end the airplane's patent wars. - Fâché Rouge -
For every proposed solution or reform, people come up with a thousand reasons why it can't possibly work, and why we can't change the status quo.
I guess the implications of that are obvious - We're living in something approaching the best of all possible worlds.
Therefore we shouldn't change anything.
On our current course, we're set to virtually eliminate the middle class in several more decades, so I guess that makes the world a better place. I guess that makes it sound like my status as a member of the middle class is making the world a worse place, but I guess I'll go on being "evil" as long as I can mange.
But let's look at the bright side...
Without a middle class, we won't need as much infrastructure, since most of us will be walking or taking a bus, since we won't be able to afford cars any more. We don't need to bother fixing that aging infrastructure, we can just decommission it. Decaying infrastructure problem solved.
As our income sinks lower and lower, even those low-paying jobs currently taken by illegal immigrants will start to look attractive. Americans will take the low-paying jobs. Illegal immigration problem solved.
Once there is no middle class and the wealthy are safe in their gated communities, drug addicts won't be able to find easy victims to support their habits. They'll wind up going cold-turkey simply because they can't afford the drugs on their own, and are no longer able to steal enough. Drug problem solved.
The military becomes the only reliable employer, since all other decent-paying jobs have been sent overseas. There are so many people trying to get in that the military can raise their standards back up to where they ought to be. Recruiting problem solved.
As we quite being able to afford to travel, we can take the national parks and either mothball them to eliminate cost, or out-and-out sell them as resorts, generating revenue. Not a solution, but certainly an assist to the deficit/debt problem.
The living have better things to do than to continue hating the dead.
Eliminate bankers!
Essentially the corporation will be broken into divisions and sold off in pieces. Most of the actual productive jobs will remain. We have quite good knowledge, experience and track record of breaking companies into smaller pieces. In the long run, the competition creates more jobs and more vibrant economy. When AT&T was broken up by court order, and before the baby bells re-agglomerated into Verizon, we had a nice trajectory of falling prices and improved services.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21 / 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show. Source: http://www.washingtonpost.com/business/economy/wall-streets-resurgent-prosperity-frustrates-its-claims-and-obamas/2011/10/25/gIQAKPIosM_story.html
no comment
"Let us break up any bank that has more than 10% market share in retail banking. Any investment bank that has more than 10% market share."
Actually, bank size is NOT the problem. Canada only has seven banks and they are of course bigger than US banks with all their alleged competition.
'reinstate Glass-Stegall act."
That is indeed the regulation situation in Canada and Canada's economy did NOT go into the shitter.
"Let us do it peacefully when we still can do it in an orderly manner. Else someday roving mobs will be pulling out chairman of Goldman Sachs hiding in sewer pipes."
Screw peacefully, I want to see the banksters get frog marched to the Guillotine.
I say that THEY are the terrorists. The DESERVE to be treated like Quadaffi...
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Must be nice to live in the Capitalist Dreamworld. Maybe you should learn history and see what kind of economic disasters that invariably causes.
Great Intellect...
He actually said companies that have received bailouts should ban bonuses. (listen at 8:00 from the below clip.) This could be an easy thing to do, tied to the bailout money that they receive. Though he argues other places, that the banks shouldn't have been bailed out in the first place, they should have been allowed to fail. Bailing them out has rewarded those that have made mistakes, socializing the losses and privatizing the gains - this is the definition of crony capitalism. IT'S NOT CAPITALISM. This is incredibly important to understand so we can get out of this mess. Listen to him at 6 minutes in: "we're not living in capitalism, we're not living in socialism, we're living in some weird combination, with a cartel, the banks controlling more than their share". "It's a compensation scheme nothing more." "they blew up in 82-83, and they blew up now".
Unfortunately, now these liabilities have been moved from the banks balance sheet to the government balance sheet, moving lethal risk from the banks to the sovereigns, which will blow up the monetary system.
He also goes on to talk about the code of Hammurabi 1750 BC: "If a builder builds a house and the house collapses and causes the death of the owner of the house, the builder shall be put to death." "If it causes the death of the son of the owner of the house, the son of the builder shall be put to death" The Romans also implemented it, "If you were the engineer of a bridge, you had to spend a few nights under the bridge" "CAPITALISM IS ABOUT INCENTIVES, BUT IT IS ALSO ABOUT DISINCENTIVES."
Here is the clip of him on bloomberg:
Am I the only one who has a man crush on Taleb?
http://www.zerohedge.com/news/nassim-taleb-occupywallstreet-and-his-updated-views-global-banking-system
If they provided a worthwhile service, then demand for that service should increase at the competitors' shops, resulting in growth and expansion there allowing for the majority of those people to get taken in.
Happened with my dad 10 years ago when Mosler went under. ADT ran around and snatched up every last ex-Mosler guy they could.
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Simple except that some banks are so big and entangled into the system that if they go down, it would start a chain reaction that would take down the entire financial system, destroying other banks, creating runs, destroying pensions, toppling industries and ultimately collapsing the entire world economy.
This isn't an ordinary situation with two lemonade stores competing against each other. These are companies that have gotten so huge that entire governments depend on their existence. The consequences of their failure is so significant that countries are forced to essentially pay them if they ever get in danger of bankrupcy. Hence the bailouts.
The "fundamental rules of capitalism" don't allow a company to profit exorbitantly to the point that any failure can tank the entire system. Reward requires risk. And the heads of these companies know that there is no risk really-- not to them personally because they have golden parachutes and bonuses that pay out before the cumulative damage to their companies is done-- and not to the company, because existentially losses will be covered by the government/people to avoid the destruction of the world economy.
So it's not so simple, really.
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It is far too easy to create corporations, compared to real human beings.
I know how to make a real human being, in any state of the union; there are lots of instructional videos on the internet. Please point me to a video for creating a corporation as easily, and as pleasurably if possible.
As popular as it may be to blame wall street, occupy wall street, lynch wall street, etc these days ... wall street isn't the problem.
As far back in time as anyone cares to cite a reference for, the profit motive, which in modern times, is mandated by the requirement to pay property taxes just to nest and live, left unchecked, will do "bad things" in search of more profits. We know this. We *all* know this. The entire world knows this. We have pictures of little children working 16 hours a day for slave wages from the industrial revolution to remind us of this.
The latest crisis is NOT, repeat, NOT the fault of wall street ... it is a massive failure of government. Government, decided it was a good idea to loan money to people who couldn't afford a house, and provided the source of money for it to happen. Government, decided it was a good idea to allow banks to create securities from said mortgages for people who couldn't afford a house. Government, after allowing all this behavior that was previous illegal, failed to pay attention to the systemic risks created by government.
Wake up you cry baby blame the profit motive evil bankers people. It was your beloved big government that screwed you.
It's not the bankers, it's the governments fault, stoopid.
You obviously have no concept of economics or banking at all. The "bankers" that make huge bonuses have nothing to do with retail banking, deposits, etc. They are either in Investment Banking or in Prop Trading.
Investment banking forms the basis of every economy on the planet, even those that are quasi-communist in their organizational nature. Without fiancing and lending you wouldn't have any building construction, any schools, any infrastructure, any anything that couldn't be paid for up front.
Prop trading (making investment bets with firm capital) is the bedrock of capital markets and in addition to the hundreds of "banks" that do it are the tens of thousands of private investors and money managers. Again, without people willing to spend money on investment "bets" you would have no innovation, no iPhones, no Google, no internet, and we'd all still be farmers producing just enough for ourselves.
But pleaes, carry on.
Things only make sense if the company goals are aligned with the individual goals. If we eliminate bonuses for the individual, we would have to do the same for the banks themselves. This would amount to nonprofit banking. I would put my money on such a bank...
The issue is that all banks were shitty and risky and credit unions were extremely strict. You throw some Reagan era trickle down policy into the mix, deregulate banks, and artificially raise the price of property over the course of 20 years to the point where people have to go through banks because the credit unions realize the risk of giving out loans in a shaky market and bam! That's basically what happened. And the banks went bankrupt and we had the option of a) letting the banks collapse and forcing the American population into such a strict loan situation that people would have killed the real estate market or b) bailing them out to relieve the stress on the American public that would otherwise no longer be able to sell their property or buy new property. We picked b. The issue is, we picked b without imposing regulations that restricted how they used their free tax money.
That's why we need to impose rules upon the banking system. Capitalism is broken and encourages wealth to sharply rise to the top instead of having a more balanced distribution. When the people with the wealth are also the people making the rules, it's time to reboot the system. Unfortunately a reboot isn't an option, so imposing rules until the situation naturally takes care of itself is the only reasonable fix.
I'm all about small government and giving rights back to states, but we've got to clean house before redistributing power.
Wise men say, "Forgiveness is divine, but never pay full price for late pizza."
Often times some of the biggest shareholders are the executives of said corporation so that would be directly rewarding them for executing their company.
I got here through a series of tubes
The Bonus is NOT asymmetric.
Each year the employee is given a target or expected bonus (that is often mentally added to the employee's base salary).
They can perform either above or below the firm's expectations.
As the employee has an expectation of the target bonus, there are REAL consequences for failure.
In addition, the employee's base salary is sometimes below cross industry norms!
Employees do NOT take unwarranted risk.
There ARE disincentives to failure.
No, cause it's like the contractors working on the Death Star in Return Of The Jedi. They knew the risks, it's their own fault.
this is completely wrong. the assumption of what caused the fall was wrong.
the punishment for bad investments is to let banks die off when they run out of capital, and not to give them free money to stay in business. or, in the end, to let banks lose money for bad investments. this is how investing works. people make educated guesses. when they are right, they get money. when they are wrong, they lose money.
big banks get free money (or minute interest money) from the fed, and loan it out (money goes from treasury to the fed, then fed to the banks, then banks back to the treasury). the punishment for a bad investment should be that one has to eat their losses. and buying insurance from a company against those losses, and then letting the gov't back that entire insurance company shouldn't happen. so the gov't is breaking the rules. they are letting banks get money when the banks are right, but not letting them lose money when the banks are wrong.
if you want to punish brokers for bad investments, how about we just let them eat their losses like the rest of us.
the crash happened because there was too much money out there. the fed is printing money out of nowhere, and banks had so much money that they were giving it away to idiots in ARM loans and other bad loans. the world righted itself, and a few trillion was lost (in thin air, the same way it was created), and things have been fine for now. this is a decent explanation of why interest rates haven't skyrocketed, despite the fact that the gov't is printing an insane amount of money. soon, once the economy picks up, you will see mass inflation.
the problem is that the banks gave out bad loans, the fed bought those loans from the banks at 100 cents on the dollar, and then resold the loans back to the banks at half price. the mortgage market was never allowed to correct itself, meaning that those debts weren't allowed to be called. the banks get to keep the interest on the loans, and the taxpayers pay the money lost on each loan. the gov't also makes sure it has some tight regulation around some big industries so that it can keep prices high (real estate is a good one). prices have fallen, but not as far as they should.
all of this anger at banks is very, very misdirected. it was the gov't who kept the banks from seeing the results of their own actions. the banks were bailed out by the gov't. they didn't bail themselves out. a recent south park episode hit on this a bit. the banks could have been corrected if the gov't let it happen. the gov't is to blame here. depression stinks, but it is a correction. prices will fall to the points at which they should fall. massive markups will go away because people want to be able to sell their products.
Do you feel that we should let human criminals out of jail so that their family and dependents don't have to suffer? If not, what's the difference?
and the profession clearly doesn't understand the current financial industry, where bonuses are really just deferred compensation, not really rewards in the sense that bonuses are in other industries. Both the economy and society would be much better off to not focus on bonuses but instead to actually punish corporations for not managing risk, for ignoring long-term harm in the face of perceived short-term gain.
since their bonuses are not tied to anything actually based in the real world. the only thing that will change is that their "reasons" for deserving them will become even more laughable.
This is actually a place where voting with your wallet should work, I realize that it doesn't since these companies are too big too fail. If people would start small though, and start transferring loans, checking, savings and so on to small local banks, then eventually these companies that are too big to fail, will be too small to worry about. This serves a two-fold purpose, no more tax payer bailouts to big companies, and increased revenue for your local community.
21st Century Renaissance Man
Look, you have to pay top dollar for top talent. It's just that simple. People who are good at what they do don't work for free; they don't even work for cheap. Top performers would rather starve to death than be insulted with remuneration that's a penny less than what they deserve. You want the best, you better pay for it.
What do the bankers and C-Level execs bring to the table? What talent do they bring to the organization? Having contacts with people is not a talent...
You want to be paid more? Start your own goddamn company...
I expect to be paid at an appropriate level to my experience and set of skill. I also expect to be paid more if I am constantly pulled into fix other problems as well as having to deliver on my projects. More so if I have to constantly pull your ass out of the fire because you promised something you can't deliver on.
The system is what it is because the people in charge want it to be that way. This way, they can take the giant sum of money that is 'tax' and divide it up amongst whoever is deemed worthy. It's not something that those people want to fix, because there's no way they can justify their salaries. Look, I did engineering because it was hard. You can't tell me that I can't do any one of my buddies' jobs that pay them many multiples of what I make, as well or better than they do. I remember these classes in college - they were electives and they were all bullshit.
Great link! I agree that the real problem is that we have these firms that are too big to fail. Asset price bubbles (like internet stocks and real estate in the past couple decades) are going to to happen, but we must not support firms that exacerbate the issue with a government guarantee.
The only problem with this, that some other corporation will have to step in and take the place of the dead one, so those who were actually good at their jobs can find new ones, and those who sucked and caused it to fail to begin with will be shit out of luck, as it should be. Right now, they still suck at their jobs, but they have them, just waiting to fail again.
21st Century Renaissance Man
Shareholders are the reasons these idiots are doing idiotic things. Fuck the shareholders - put it into a fund to be distributed out equally to every tax paying citizen (note I said citizen, not person (corporations don't get anything), not undocumented laborer).
In fact, let's just dump the stock system altogether, get rid of it. It's caused too many problems. Also, hold the board fiscally responsible for any debts owed. Take their assets too.
"Talent" is often not as talented as it thinks it is, most finance people cannot beat the market. They're nobody special except business and finance people get to decide how much they're worth unlike everyone else. The only reason I want to get an MBA is that every boss I've ever had with one was stupid and irresponsible, operated with no oversight and got paid way too much for it. Last boss I had got in drunken car accidents with his company car, ran up 5k of business lunch a month came in at 10 and left at 2... always working from home on fridays. Often times we'd have major projects going on that he seemed just barely aware of, more than once his lack of involvement meant trouble for us as he communicated misunderstanding through the rest of the company. The man he replaced was even worse.. timing bathroom breaks and trips to the coffee pot at an IT department and demanding a hour by hour play by play of each employee's actions at the beginning of each morning. Despite this often he would be found sleeping in a pile of his own fat behind the desk. It took literally the entire department walking into the CEO's office and swearing they'd leave if he wasn't gone.
I'm worth 100k/yr as long as I do better than *THAT* and have an MBA, the fat one didn't even know anything about computers.. just his "business smarts" made him more valuable than that room full of network and software engineers.
I suppose it's only a matter of time until the government does indeed get into the act and dictate maximum compensation - they are already in the business of dictating compensation, insofar as demanding people sell their labor for not less than a government dictated price (ie minimum wage laws), so price-fixing of labor at the other end of the spectrum is a natural progression. People already accept that it is appropriate for government to remove the free will of an individual to sell his or her labor at the price of his or her choosing when that person picks a price point too low; it's natural that the government would next remove the free will of an individual to buy labor at the price of his or her choosing - really, it's all just a matter of degrees once you cede the principle that adults are free to decide their labor's price.
We could allways force them to walk down the streets, it is rather easy, just fill the streets around the banks with spikes, so they can not go in and out in their lioms, then, hit them with rotten eggs. It may not fix the problem, but I would volunteer to help. I'm sure will be lots of fun!
The problem is the corporate influencing the political class. This lead to the bail-outs. Investment banking and commercial banking should be separated. Investment banking should not hold commercial banking as ransom. Furthermore, there needs to be an adequate capital base. Leveraging a firm 30:1 (3% capital) or more is ridiculous. The max should be 10:1 (10%). The larger and more systemic the bank, then the lower the ratio...NOT higher. Finally, there was -and still is- no good reason to save failed institutions. Capitalism is about creative destruction. Shareholder get wiped out, bond holders get the assets, and management gets the boot.
Let's just seize all the money in existence and divide it up evenly. Would that make all you socialists happy?
"And now, Frank N. Furter, your time has come. Say 'goodbye' to all of this, and 'hello'... to oblivion!"
There's always a disincentive for failure. It's called losing your job, and having your business fail. But, wait, that's right, by creating the bailout, government got rid of the disincentive for failure, so now you tell me they have to get rid of the incentive for success as well. Idiots.
Let the government stick to punishing real crimes, like fraud and assault, and let failure be its own punishment.
Quit messing with my incentive for success, I'm trying to feed my family here. The bank I work for is already under a pay freeze, I count my lucky stars that I escaped the layoffs, I don't need any more "helpful ideas" from people who hate the industry I work for.
Good judgment comes from experience.
Experience comes from bad judgment.
If the banker takes a risk and it pays off, why not give him a bonus? If there is no downside to losing a risk, that's the bank's fault.
The important thing here is that when the bank's internal policies fail, it is of the utmost importance to allow the bank to fail. This is called the free market. Bailouts are not free market.
Nope, no problem at all. Should we end the war and create thousands of unemployed Veterans? The innocent will be able to find new jobs, and they will know better not to do that in the future.
The people who drove the companies they worked for to the brink of failure received bonuses.
I don't think "best talent" applies in this discussion.
And ...
Why didn't they know the risk? Why did they get that plan approved?
At a certain point you have to understand that the people doing this were not stupid. They knew that they were taking risks.
And as long as the risks paid off, they pulled in lots of money.
But ... as with ALL systems like this, EVENTUALLY the risk does not pay off. And then the company has to cover the loss.
That is the problem. They weren't stupid. They were just betting that they would retire/move BEFORE the risks failed. And since it brought in tons of cash for AIG, the same thought process was shared by management. Get the money while the getting is good and just hope that you aren't the one left holding the loss when it collapses.
Which is why we had REGULATIONS about how these things work.
So the banks were able to lobby Congress to get the regulations removed / reduced / overlooked / whatever.
All corporations say the same thing: they have to give execs huge money to retain the "best and brightest."
Viacom, 'Decimated By Piracy,' But Its CEO Got The Biggest Raise Of Any Exec Anywhere
We keep hearing about how "piracy" and the internet are somehow "destroying" the old legacy content players, but the evidence for that seems lacking.... especially in Hollywood. We already saw how Warner Bros. was cheering on its record-setting quarter, while complaining about how it just can't compete with piracy. And now we've got reader Don, passing along the news that Viacom chief Philippe P. Dauman topped the charts for the exec with the biggest pay raise in 2010. His total pay was $84.5 million last year -- a 148.6% raise on his previous year's take home. Yes, that's a $50 million raise. Admittedly, much of that comes from stock options, but still. Not bad for a company being "decimated" by kids in their basements on the internet, huh? - TechDirt
Or a community bank.
That will get their attention.
in the financial sector, for the most part they are really a variable portion of a de facto annual salary, and almost everyone in the company from legal to the receptionists, not just traders, are paid in this way. So a receptionist may earn what is considered their annual compensation of 70k, but only 40 something in base pay and the other 30 paid in one lump sum in December or January. Yeah it's a bonus in that they're never quite sure how much it will be each year, but everyone expects around a certain amount as part of their compensation for the year. In a banner year they might decide to reward everyone with bigger than expected bonuses, but in a terrible year they can skimp. If they have to lay people off, they only have to pay severance/benefits on base salary.It's an accounting scheme/liability coverage more than it is a true bonus. So back when financial reform was kicking around and people were demanding that any firm that received bailout money not give bonuses to anyone, all those people were bricking their pants. Imagine you're a secretary or paralegal at one of those companies. You have a family and mortgage, and suddenly because of pressure from Washington and an angry public you lose 30-40% of your expected wage for the year. You're in deep trouble.
So it's important to remember that for the small minority of bad actors who got us into this mess, there are so many more people in the financial sector that had nothing to do with it that are just trying to do their jobs and live their lives.
Which is why it will never happen.
You mean, other than when it does happen. Which it already does, and has many times. Other than that, right?
Have you checked in on Enron lately? Or the huge, publicly-traded accounting firm that helped them muddy the financial waters? The death penalty was applied to both, and swiftly.
Don't disappoint your bird dog. Go to the range.
I think in more PC terms... Americans have lost our sense of Risk. ...
We want things to be safe.
Lets outlaw any product that could be dangerous while the benefits are measurable (think Vaccines, Cell Phones, Some type of plastics.)
Lets make sure no child is left behind.
Lets go to the shop in those big named box stores in the suburbs not those small shops in the city.
We have gotten afraid to take risks. Go to that new Chinese food place, you may love it or you may be on the can for the rest of the night. But you now tried it and you know.
If something is so important that you feel the need to post it on the internet... It probably isn't that important.
Bonuses can be paid on short-term gains
Oblivious to long-term risks
Because banks can exploit short-term risk
Oblivious to long-term risk
Because when risks come home to roost
They know that they'll be rescued
Because the crisis (and ambulance-chasing media) will rile up the citizenry
Who will call for "someone to do something"
And the Federal Government will step in to save the day
With help from a place called the Federal Reserve
Which is some kind of group that has "something to do with money"
And through deliberate obfuscation and obscured data is almost impossible to understand
Run by some people who sure sound smart (or at least boring)
And so must know what needs to be done in such a crisis
And even when I hear something about "The Fed"
Giving (or maybe it was loaning, I wasn't paying attention) trillions to "stabilize" and "liquidize"
I'm sure they did it for the right reasons
Because that's what everyone with them keeps saying
And since there was no "Big Bank Bailout Tax" bill, it must be OK
Because it doesn't affect me (as far as I can tell)
(Though it will, but it'll be called "unexpectedly high inflation" and I'll have no idea)
If there was no Federal Reserve
Whose "elastic" money can be created at will
(Not even requiring paper or printing, just typing)
(And not at all like my money, which I have to work hard for)
Then when a broker made an big bad investment
They would cause their company to lose a lot of money
Or even go out of business
(Which happens to anyone else who screws up)
But to save the company
The government would have to find money
Because they'd have to use real money
Which they'd have to take from someone else
(Since governments can only take real money or make fake money)
And they'd have to convince a lot of people that saving the company
Is more important than paying for kids college or eating or taking a vacation
Which would be like a "Big Bank Bailout Tax"
And would affect me
So I would probably care a lot, and say "No"
Because if a broker is making big bad investments
He shouldn't be working as a broker
And his boss shouldn't be letting him risk the company
And the company's president and board should care too
Because they'll lose their jobs if the broker makes big bad investments
And they can't count on being saved from their own stupidity
So if a broker makes a big bad investment
It's probably a good thing that the company goes out of business
So everyone knows those guys are bozos
And won't let them do it again
Rather than being saved by the Federal Reserve
And using that money to pay themselves bonuses
Because their big bad investment paid off
Just as well as they had all expected
Banks are generally allowed to fail. Quite a few go bankrupt every year. The US facilitates the transfer of their remaining assets to other banks that are healthier. The shareholders in those failed banks lose their investment. The executives have to find new jobs. Depositor runs are avoided by the FDIC guaranteeing deposits. The problem that happened in 2008 and 2009 is that quite a few very large banks were on the verge of going under and threatening to take down the entire economy with themselves. Credit markets were locking up. At least one money market fund was breaking the buck, with more threatening to follow. Credit is essential to capitalist economies and events that have a high likelihood of shutting off credit to most of the economy are something to be avoided at all costs. The problem with banks like Citibank and Goldman Sachs isn't so much that they're so big, it's that they're too connected to everything else. When their executives bet the company and fail, they don't just bankrupt their own companies, they also drag down a lot of other companies, including other too big to fail banks. We got a taste of what could have happened when Lehman Bros. went bankrupt. If too many banks fail the FDIC wouldn't be able to guarantee that it could cover all the money people had deposited, resulting in runs on banks. If too many of those big banks go down at once it's likely the economy would lockup, and we'd see a recession much worse than the one we just went through. The problem isn't that the big banks were propped up in order to rescue the economy, it's that not enough reform happened as a result.
A lot of minimum wage earners get tips. This is essentially the same as a bonus. If you do an excellent job, you get a big tip. if you do a fair job, you get an average tip. If you do a horrible job, you for some reason still get a tip. Just like the bonus structure.
If you are not allowed to question your government then the government has answered your question.
...this is the definition of crony capitalism. IT'S NOT CAPITALISM. This is incredibly important to understand so we can get out of this mess. Listen to him at 6 minutes in: "we're not living in capitalism, we're not living in socialism, we're living in some weird combination, with a cartel, the banks controlling more than their share". "It's a compensation scheme nothing more." "they blew up in 82-83, and they blew up now".
There are very few Capitalists in high end finance. Mostly, they are monopolists, trying to destroy the competition, rather than keeping the game fair.
Imagine that the economy is a marathon. Capitalist runners would run as hard and as fast as they could, to win the race. Monopolists try to trip up the competition, so that they can saunter across the finish line, and be declared the winner.
All ideas^H^H^H^H^Hprocesses in this post are Patent Pending. (as well as the process of patenting all postings)
Death penalty is easy, just dissolve the company. Sorry workers. Maybe you shouldn't work for a company that is negligent enough to cause people's death.
As for incarceration, all profits go to the government for the term of the sentence. If a publicly traded company than any trades are frozen for the term of the sentence.
Other ideas welcome.
Then again, I don't think organizations are people and shouldn't be allowed to participate in our government. That means unions, political parties, any grouping of people. No contributions to campaigns and strict limits on ads and such.
But that's just me.
I was thinking more of the legal solution. The market one only works rarely.
"Who is the Journal of Quantum Physics going to believe?" --Stephen Hawking
Eliminate the bankers instead.
Busboy, dishwasher, short-order cook, ditch digger, gas pumper, tireman, mechanic, gas station manager, rocket scientist, programmer, systems analyst, sysadmin, netadmin, net architect and currently group leader for R&D. There's four and a half years of college between the half-decade I spent in the gas station and the two years I spent working on ICBMs and the space shuttle, and I probably forgot something else somewhere in the sequence - I'm old. I left out unpaid and volunteer jobs.
But so what? I didn't claim my job was so hard I need to be paid handsomely for my inconceivable stress. My personal job history has no bearing, and anyway parenting is harder than any job I ever got paid for.
Instead of paying people based on their self-inflicted stress levels, imagine paying people based on value delivered to other human beings. Then garbage men and teachers would be paid more than anyone else, and bankers would make something far closer to minimum wage.
A corporate "death penalty" does exist (sort of) in cases. It was used to kill Arthur Anderson (seems fair).
http://en.wikipedia.org/wiki/Arthur_Andersen
Kill 'em all. And stockbrokers, too. The world will be a better place.
Let the bankers make their deals
Let the bankers get their bonuses.
But if, in the following 3 years, a deal goes sour for the client, then the bankers have to pay back the bonus they got for that particular deal. Unlimited liability. That will stop the ridiculous practice of giving loans to people who cannot possibly afford them, then insuring that loan with a third party. Those bankers knew what they were doing when they bundled up the toxic debts and sold them to investors.
And for gods sake, do something about the ratings agencies.
Its embarrassing to see it on Slashdot, let along lauded with points as being insightful. I can cherry pick opposing professions and get any result I want and it makes no difference in the discussion.
You don't do the job so you cannot claim how stressful or demanding it is. Any claim is talking out your ass. Let me give you a hint, these people have bosses too, I can guarantee that they get asshole bosses like other people do. I can guarantee they are worried about the rent/mortgage, the kids, the wife, the health care, the same shit we care about.
Yeah there are some reckless players out there but if the industry was so bad as you and many other haters claimed there would be no banking industry. It would never have survived.
The real problem starts in Washington, with the people there who sell us out everyday so that they can stay in power. You have a President who lied every day of his campaign about change, and what did he do? Put two people from Goldman Sachs into decision making positions of the US government, - including one who could not be bothered to pay his taxes.
Now tell me again who the problem is?
Karma be damned, this place is starting to suck royally. A bunch of over privileged angst ridden losers whose only risk is they don't get the good parking space at work
* Winners compare their achievements to their goals, losers compare theirs to that of others.
We should cut professor bonuses as well. You know the ones where they do a study and get up to 20% of the take.
People know who they're working for and should ideally have some idea of what they are doing there and what is happening around them. If it's their choice to work there and profit from the corporation's actions (by getting paid), they should also face the consequence of the actions they were in some way involved in.
Work for honest and stable corporations - your job is safe. Work for criminals or gamblers - be prepared to live on the street.
So the bonuses do NOT reflect their performance.
Isn't that exactly what people have been saying? No matter how bad they do, they get bonuses, because the bonuses are not tied to performance (no matter what the claims are).
Instead, it is friends awarding friends more money from the company's coffers. As long as there is money in the company, the bonuses will be awarded. Even if the company is in danger of failing and putting hundreds or thousands of people out of work.
Those same friends are the ones who wrote those contracts.
Fuck them. Fire them and invalidate the contracts. At least the lawyers will have something productive to do.
If corporations are people how can one impose death penalty and incarceration to them?
How about if a corporation is awarded death penalty, all its assets would be sold,the proceeds will be distributed to the shareholders, the corporations name, ticker symbols and other trade marks will be sequestered for ever?
It is far too easy to create corporations, compared to real human beings. Corporations do not require visa/green card/work permit/citizenship to work and profit inside the USA. So we can apply the lower standard of "preponderance evidence" to award death penalty to them, not the stricter "beyond reasonable doubt".
Any corporation that is too big to fail, is too dangerous to exist. They should be executed. We bailed out the financial institutions. They technically are living due to our mercy.
Let us break up any bank that has more than 10% market share in retail banking. Any investment bank that has more than 10% market share. And reinstate Glass-Stegall act. Let us do it peacefully when we still can do it in an orderly manner. Else someday roving mobs will be pulling out chairman of Goldman Sachs hiding in sewer pipes.
Let's just hope you don't work for an "executed" corporation. You're just throwing potentially hundreds of thousands of working class people out of a job to punish the top tier - no problem with that, right?
None. Would you accept not incarcerating someone who murdered your child because their gardener would be unemployed? If corporations are people, they are treated as people. (The fact that if corporations are actually people in the sense of the 13th, and 14th amendment you can't buy and sell them is irrelevant.)
People are leaving out a impotant fact - not everyone who works at a bank is part of driving risk. There are many people who do the day to day tasks like making sure the website runs, or the phone systems work or the applications for banking agent and tellers work. Do you mean when those people do a great job they do not deserve some sort of bonus?
Really? The CEO thought that it would be a good idea to have a division taking on massive debt for the company without oversight?
Wow!
And the board of directors agreed with the CEO?
Double wow!
So not only didn't the CEO and the BoD know what was happening in a division that reported to them AND was allowed to take on massive debt ... but that same CEO actively lobbied Congress to prevent regulations that would require limits on that division that he did not know about.
All the while, taking in HUGE profits and bonuses.
That is some amazingly specific ignorance for a CEO.
I mean, if my bank account suddenly started going up much faster than I had calculated, I'd probably do some investigating to see where the additional money was coming from.
Yes, it is.
Yeah, the political (actually, politico-economic) system involved is called "capitalism", which label -- as a term for a politico-economic system -- was coined by socialists to refer to specific real-world economies that they were criticising, particularly, those of dominant in the developed (for the time) world of the early-to-mid-18th Century, which exhibited exactly the features you claim are not properties of capitalism. (Prior to this "capitalist" was used to mean an owner of capital and "capitalism" was used to refer to the state of being a capitalist [in the sense just described], but "capitalism" wasn't used as a label for an economic or political system.)
You think government insurance for deposits creates moral hazard[1]?
WTF do you think the lender of last resort facility of the Federal Reserve causes?
Banks are inherently unstable, they run at 20->50 times leverage. Small losses can wipe them out. They can only do this because they are backstopped by the US Government to the tune of trillions.
[1] http://en.wikipedia.org/wiki/Moral_hazard
Deleted
Where was this businessman you were talking to from anyway? Nigeria? Do you know how many millions of consumers would have sustained direct losses by the bank failures in the last 3 years absent that protection?
Most industrial states provide some kind of deposit backing for the general population. Primarily because it does an effective job of protecting the population from risks taken by bankers and it does so by making all banks responsible for the failures in an indirect way. Removing that insurance isn't going to make the banks stop taking risks, it will only pass the risk to general population in a very direct manner.
The FDIC gets its pool of cash, which it uses to cover the losses for the banks it takes over, largely through fees extracted per dollar, per month, per bank. That's right, your bank pays a monthly insurance premium for holding your money. The bank then passes it directly or indirectly back to their consumer or business.
And the system has worked well for what it does, the last 3 years have proved this repeatedly. Even with the major increase in bank failures over the last 3 years, I didn't lose any money when the credit union across the street from my house became insolvant.
Some people have been concerned about the FDIC becoming insolvant (running out of cash to pay the depository losses of the failed banks), but so far that has not materialized as a real issue. And even if it did, the Fed would just give the FDIC a loan which they would quickly pay back with the fees they get each month.
-- No matter how great your triumphs or how tragic your defeats, approximately one billion Chinese couldn't care less.
No problem with that at all. Isn't that a "free market" in action? If the people in question are talented and not involved with the corporate crime, they'll have no problem getting hired by whatever company taking advantage of the situation (again, the so-called "free market" in action).
Canada also doesn't have the root cause of the banking failure in the US either, the CRA. If the changes to the CRA in the 90's hadn't been made, a certain computer model concerning the performance of CDSs would never have been popularized because the banks wouldn't have been looking for any possible way to make good on a bunch of absolute crap paper. Without that computer model, the banks would never have shifted their lending positions for ARMs and FRMs(banks generally don't do anything new without an outside impetus, in this case government regulation, forcing their hand. There's a REASON that the stereotype of a banker is that of a stuffy nobody with a giant stick up his ass) Therefore, the bubble would never have inflated at the rates it did, and it never would have popped so explosively.
More importantly, it was for the most part the pure investment banks that were the actually in serious trouble(remember, quite a few of the banks received money not because they needed it but because if only the banks that needed it received funds there would have been a mass exodus from those banks causing them to crater anyway.) and were the ones crying TBTF most earnestly. This means that even had Glass-Steagal been in place nothing would have changed, except that the banks in question may have failed even after government intervention.
Ah, how I wish I could assume you were being sarcastic. :)
You want the truthiness? You can't handle the truthiness!
>How about if a corporation is awarded death penalty, all its assets would be sold,the proceeds will be distributed to the shareholders
But the shareholders are the ones who get rich if the corporation does well, even if it's engaging in bad or illegal stuff. They reap the benefits, but if the corporation they own does more damage than it's worth, the owners are not liable.
A rabid dog causing destruction and maiming would get it's owner into more trouble than the economic loss of the value of the dog.
The least we could do would be to confiscate the assets and not distribute the proceeds to the owners, but to all citizens.
Some of my favourite people are from th US; Vonnegut, Chomsky, Bill Hicks.
my suggestion:
any earnings above $200k per year are marked as 'at risk' by law (in any company)
you (the highly paid employee) get this cash - but it can be recalled by the company if either:
1) it was shown that your negligent actions caused a major loss (your investments were toxic, your giant contract was a fraud,etc)
2) the company fails (goes bankrupt, requires bailout, etc)
the 'at risk' cash would gradually transfer to 'safe' ownership over a period of 5 years (20% per year)
this means that if you are a high earner at any company, you have a powerful interest in making sure that company doesn't screw up.
the ordinary workers who don't really have the ability to influence policy are protected - but anyone who earns a lot should then make it their business to understand what risks the company is taking.
so company directors who run their companies into the ground - creditors can come after your 'at risk' earnings for the last 5 years
banks that fail - 'at risk' earnings go back into the creditor pot
etc, etc..
VLC Remote for iPhone and Android
The government intervention in the mortgage industry (implicit backing on Fannie and Freddie, among other things) resulted in a skewing of the risk model for those banks. In a truly free market, bank boards of directors can choose whatever compensation plans they wish, but the banks will not be bailed out when they over-extend their portfolios with too much risk.
Roving Mobs don't have a clear understanding or definition of what "Person" means.
We get all upset and bothered over mexicans coming in and "stealing our jobs" but hell if we're going to pay more than $4 for a hamburger at McDonalds, because we had to pay some white kid minimum wage to pick the lettuce that goes on top. And the "illegal alien" that is the Chinese factory worker, who made our iPod, which we'll gladly contract out for about $250, but if we had to pay American unionized factory workers to make one, we'd be paying closer to $3000-$4000. That's enabled by NAFTA, of course. (and the H1-B stuff, as well).
We need to understand that the definition of what constitutes a Person, and who has which equal rights, is really important. That definition must be equal for all, and must have a delineation defined by national boundaries, currency use, taxation use, and it must be equal for Capital (Corporate persons) as well as Labor (actual working human beings). Otherwise, Capital will exploit those loopholes for profit. (and, in fact, use its unequal influence on government and policymaking to create larger and more obscure loopholes to exploit - which is exactly what has been going on for the past 30+ years in this country).
A NATIONAL border is part of the definition of one's personhood, one's legal rights, one's citizenship. I'm not saying that we need to build a wall or anything like that. I'm saying that this needs to be taken into consideration when we're talking about defining corporate personhood, free trade and the like.
These are my friends, See how they glisten. See this one shine, how he smiles in the light.
In truth: Banks execute Corporate Death Penalties all the time. And yes. Hundreds of thousands of working class people get tossed out of jobs. And the top tier do avoid punishment. In most worst-case scenarios, they are in forced-retirement. In some worst-case scenarios, they're personally liable for fraud or white collar crime, and get their little slap on the wrist, but in the overwhelming majority, they end up in positions of trust at other companies in due time; while the rank-and-file have their lives disrupted for things that were no fault of their own.
Government mostly stands by and watches - or assists the Bank in the lawful execution.
Examples:
Enron
Arthur Anderson
Lehman
Madoff and Associates
These are my friends, See how they glisten. See this one shine, how he smiles in the light.
It's true, and this is the place to start thinking about a complex world. Why do you stop there? The current loop between your amygdala and your cortex creates a magnetic field that shuts down everything in between? What a peculiar failure mode.
In game theory, a dominated outcome never transpires, so you proceed as if that eventuality is entirely precluded in the game tree. With prudent leverage, there's no problem here. When prudent leverage shades into reckless leverage, there is a problem here.
You get the same problems with the MAD doctrine from the 1960s. Nuclear exchange is a dominated outcome until one side or the other succumbs to despotic insanity.
Strange mathematical levitation is also observed in the chicken and egg problem.
Therefore what exactly? Change involves risk, and a society that can't organize itself to embrace prudent risk leaves a lot more on the table than the one which risks a few stubbed toes. I don't see how we'd be busy fabricating chips at 20nm design rules on the back of a depository banking system. Perhaps over a thousand years, we could evolve the social capital to make this work. Any takers? We've been evolving social capital in our current system since the invention of coinage. East Germany stumbled for twenty years when abruptly brought in from the cold, despite lavish support from a rich uncle. But we all know the Germans are lax in confronting a challenge.
The boundary between prudent risk and reckless risk needs to be policed vigorously so that it doesn't degenerate into a Taleb tail consisting of terminal events with non-zero probability.
This is a hard problem. The core of the problem seems to be mobilizing political sentiment to do this (many stones remain unturned) when political will in society is dominated by whichever group is presently experiencing the most outrageous short-term profit.
The banker's prayer: Lord make me prudent, but not yet!
I halfway agree with Taleb. Perhaps we can keep the bonuses, but have the creditors award them rather than management. A sufficiently large bonus ought to imply that the bankers are so brilliant that nothing could possibly go wrong. In awarding a bonus at this threshold, the creditors would be required to sign documents waiving their bail-out privileges (which should directly impact their reserve requirements for their own operations). The waiver could be on a sliding scale. I'm not sure how to optimally engineer the transfer function. At what point does a bonus imply competence? $10 million? $100 million? Hard to say. We could get tangled up in argument. Perhaps best to leave the system alone. It seems to be working so far.
You say that like it would be a bad thing for employees to have a direct stake in the ethics and competence of their management.
fuck Nassim and his camel-jockey, foot-stamping, metrosexual urban Euro-weenie friends
Like I said before, that's some amazingly specific ignorance on the part of the CEO and the BoD.
And yet they lobbied Congress to NOT regulate the stuff they did NOT know was going on in the division that they never bothered to check. Despite that division racking up massive debt for the company.
And yet you postulate that the CEO and BoD did NOT know what was going on in that division that was making all the money that they like so much.
Again, that's a very specific form or ignorance.
I like money. But if my bank accounts start showing more than I expect them to, I'm going to investigate.
You are totally correct. If you cut a top US banker's salary or compensation, he'll just go to Singapore or Hong Kong and get paid what the global market allows.
You are all trying to pass this off as captalism, but it would be more accurate to describe this as simple supply and demand for valuable sales and client managment staffing.
-- No matter how great your triumphs or how tragic your defeats, approximately one billion Chinese couldn't care less.
Too big to execute eh? Sounds catchy!
You don't need to actively regulate/break up banks of a certain size. You allow all banks to issue notes against gold, and remove central banking. The single-note-issuance aspect of the Federal Reserve, along with it being the bank to the banks, is what allows banks to grow large. This is explained in excruciating detail in Murray Rothbard's "The Mystery of Banking", and in summary in "The Case Against the Fed", both available at Mises.org.
In short, using gold as money, and allowing banks to issue their own notes (instead of requiring everyone to use Federal Reserve Notes), basically solves the "too big to fail" problem, because banks can't leverage deposits so much.
Giant corporation dies? yes XXX engineers xxx office staff xxx whatever type employees
hard to find xxx of X type job all with similar secondary skill sets having come from the same environment.
Small corporation dies? X engineers X office staff X of whatever type.
Much easier for X of X type job to be re-hired. on top of that entire small towns/counties and school systems don't loose there tax base/funding when 'The Mill' closes.
Much better if corporations can be killed and if they aren't allowed to grow too large. Kinda like trees growing next to your house. Provide nice things, might save on the AC bill, but you want to be able to cut one down before the fucker crushes you in your sleep.
whats too large? fuck if i know. % market share, total income Tax incentives to make 2 companies better than 1. Corporations can't own each other throws a pretty good wrench in the Hollywood accounting. I think in the industries where this is critical systems could be devised that would be simpler than our current tax and regulation regime. Not perfect not always fair but when has that ever happened?
You know what i think is unfair? Immortal uncontrollable corporate citizens that have wrenched the unalienable rights of actual human beings form the tree of liberty by abusing an amendment meant to protect freed slaves form the likes of the KKK and Jim Crow.
Or just play by the actual rules and let the market sort it out. No bail out. AIG goes under and companies involved in similar business scrutinies the risks their employees are taking a fuck of a lot more.
One or the other please. Let the market kill the stupid and corrupt or let the government interfere to an extent where benefit to "the people" always usurps benefits to "the people that buy stock".
Politics is supposed to be decided with pieces of paper.
In fact, thats true but the names on the paper are dead statesmen not potential ones.
Full Disclosure.
My 401K which has about $30k (i'm 28) was/is with AIG. I do have a dog in the fight I'd prefer to have lost all of it and let capitalism/"the market" do its job and take down AIG as it should have than to keep the money i saved and pervert the system. Right or wrong capitalism or communism you shouldn't do anything half assed. I knew the risks when i signed up(age 25), but my employers match was generous. Everyone involved knew the risks as well as me.
My problem with the whole situation is that as a society, we are rewarding the wrong kind of risk taking. We should be rewarding risk taking that is actually an investment in our future... things like developing technology like a fusion reactor or a high capacity batteries. Not betting whether the derivatives market will rise or fall. These banks are simply gambling on the price of stocks and other securities at a given point of time. Fundamentally it's nothing different than going to the casino, and that should never be supported with taxpayer money. One simple thing to do is say no more bailouts, ever, for what is essentially gambling.
The sending of this message pretty much inconveniences everyone involved.
Think about it. they can never do anything right. They always write code that has a thousand broken corner cases. They are either hackers or give hackers opportunities. They do such a crappy job our personal info gets stolen or sold. They make computers and software cost money. They are WORSE than bankers.
Who's paying these guys? It isn't the government. They're getting paid by the shareholders, who ought to be able to give money to anyone they wish.
Nope, the real problem here is the way banks are both too large and too interconnected. Instead of stupid bonus rules let's address the root of the problem and a) limit the size of any one bank as well as b) stop them from owing each other money so much money they all fall like dominoes when something goes wrong. Then when a bank is in trouble... let it fail, and let the shareholders try to claw back any bonuses. It will be something the rest of us can eat popcorn and watch without getting involved.
Limiting bonuses isn't going to keep bankers from making stupid decisions. And anyway didn't the bank bailout cost us less than the GM bailout? Why don't we end bonuses for auto execs?
The problem, and the solution, is much simpler than any of you realize: ban fractional reserve lending, and all this nonsense comes to a screeching halt! Don't believe me. Read Douglas. (My sig is a start.)
Social Credit would solve everything...
Make it a requirement for all bankers to have at least an undergraduate degree in math and physics. I have seen the so called math requirements of many of these guys and it's NOT GOOD ENOUGH. These people are studying primarily statistical math and I'm an avid believer that you can't make healthy choices based on trends and statistics without having a more thorough understanding of differential equations.
Also, while physics does not apply to their job very well directly (which is the entire point of having the physics requirement in the first place), it does make certain that no one will be able to become a banker without a pretty good understanding of cause and effect. Many people go through their entire lives without every considering the consequences of their actions. Hopefully more people go through their lives with at least "This happened because of that" or "This will most likely happen because of this". A financial manager/banker/whatever type of gambler should be able to think "This happened because of that and therefore this is likely to happen unless I..." type reasoning at the least. This is physics.
Let's also point out that being forced to grind through truth tables and karnaugh maps for a semester will eliminate students unable to understand logic. I see far too many financial reporters for example that can't understand double negatives let alone demorgan's theorem. I constantly read articles that do no interpret p and q as not p or not q. This is a critical concept when understanding markets and making predictions and these guys can't do it.
I personally know a few of these golden boys that had their faces wall papered on the financial rags... First when they were growing fast. Then when they made mistakes. Then when they were indicted. All of them were able to hop on the trend bandwagon and they made a fortune doing nothing more than buying into the days top performers and selling as they slowed down. Problem is, when growth slowed, they couldn't compensate. So the golden boy failed.
Personally, I think that the idea of gambling on stocks is fairly disgusting. I especially hate people who gamble on commodities and I despise people who consider food a commodity.
If you're going to be a financial geek.. be an investor. Invest in companies. Create jobs. Strengthen the economy. All that stuff... quit this gambling crap... it's killing us all.
It would be reasonable to consider the employees to be amongst the wronged and require that they receive full pay and benefits while they find a new job.
Alternatively, the business could be seized and sold off to a buyer willing to agree to keep all of the employees on. Any profits would go to the restitution fund.
So let's offshore the executive positions. There are plenty of countries where good executives are perfectly willing to accept much more sane compensation.
The answer is clawbacks. Let the bankers share in the liabilities and losses they cause by the risks they take. The current system rewards profit, but does not punish loss - therefore incentivizing extremely risky positions and creating massive systemic risk.
AccountKiller
Tough shit, same company will fall sooner or later. But in second case it also cost everyone money. So... Loose loose situation.
Bonuses can be a tool for accountability.
But in their current form (short term, only positive), they are the reverse
If you really want to put the bankers in their place, fer cryin' out loud stop borrowing from them!!! Especially stop borrowing at high credit-card interest rates. And if you absolutely must borrow from the bankers, at least have the foresight to avoid blowing the money on stupid consumption, a category that includes acquisition of job-free college degrees.
Yes, the bankers and the politicians have a lot to answer for. But if there is to be any lasting solution, it lies with the individuals. Neither politicians nor bankers have the ability (or the incentive, for that matter) to force 7 billion individuals to exercise any common sense.
In the immortal words of Suketu Mehta, "God help us all."
That said, given that 7 billion individuals are unlikely to acquire much in the way of common sense any time soon (too much selection pressure against it, for one thing), perhaps Professor Taleb's proposal is worth a shot.
Give 'em stock options with a few years lock on them.
Want to get a bunch of money? Make sure the company is healthy 2-4 years from now when you're able to sell off your stock.
Want to still make money a few years after that? Keep it another few years and this years' stock will be worth money.
Hey, thanks for posting a direct link so that anyone can see the complete lack of requirement for lowering lending standards.
I'm guessing you wouldn't have posted that link if you hadn't already swallowed the lie that "reasonably helping to meet the credit needs of the communities" is equivalent to "making unreasonably risky loans", and were thus happy to regurgitate it.
The problem the CRA was addressing was red-lining -- the automatic exclusion from loan qualification of applicants based not on their actual qualifications, but on their residence in a low-income neighborhood.
I welcome you to find in that link which includes legislative changes to the act the place where banks were required to make risky loans, or admit that it is in fact you that are the liar.
Or I guess you could try arguing that loaning to someone in a red-lined area is inherently an unreasonable risk and that you can say this without knowing anything else about the specific applicant in question. Cus that will really prove your point.
The enemies of Democracy are
You're proposing that only the very rich will be able to run a campaign (more so than now) and that the habitual liars in the media will be the primary source of information on candidates for public office. Yeah, that'll work out well.
Contribute to civilization: ari.aynrand.org/donate
It's quite easy to pick lettuce. Do you really believe that your hypothetical white kid couldn't pick a head every 15 seconds, 240 an hour, for less than 3 cents a head including overhead? That's about 3% of the retail price of a head of lettuce. There's less than 2 cents worth of lettuce per hamburger. The big expenses in a hamburger are beef, retail employee wages and benefits, franchise fees, profits, and physical plant.
Contribute to civilization: ari.aynrand.org/donate
Beta male is crying that alpha males have a better life than him, and wants to change this fundamental rule of human society. Good luck with that one chump.
"Lehman with unlimited liabilities would have behaved essentially exactly the same way." Empirical evidence shows otherwise. Back when investment banks were partnerships, risktaking was less, and less concentrated.
There is a simple solution to the problems: return to 1975. Screw the pettifoggery of Dodd-Frank. Don't apply a thousand cuts when two swift clubs will do.
* Investment banks used to be unlimited liability partnerships, not limited liability corporations. The partners, who were the top management, had their own lifetime earnings on the line (most of it being the partnership share of the bank). Losses were real to them personally, as in they could lose their house and wife.
* Bring back Glass-Steagall act. Divorce regulated commercial & deposit banking (backed by FDIC) which was forced to be boring and low-risk, from riskier investment banking. Then see #1 for regulating those.
A Real Capitalist system?
sounds just like the True Communist system that the deluded advocates seemed to insist was "Coming Real Soon Now, so ignore the bad Commies with guns and reindoctrination camps and in any case aren't they better than what was there before?"
Hint: Ayn Rand 'novels' have the same structure as Stalinist propaganda.
If corporations are people how can one impose death penalty and incarceration to them?
http://multinationalmonitor.org/mm2002/02oct-nov/oct-nov02corp1.html
http://reclaimdemocracy.org/corporate_accountability/history_corporations_us.html
Government grants a corporation life with a charter, it can just as easily revoke the charter. Charters used to have limited durations, were reviewed, and in the past some were actually revoked.
When you take a bank job you take it expecting to earn a decent chunk of your bonus. If you fail to perform then you get the base only and are disappointed or get sacked or leave.
Killing bonuses is not a solution. Tying the bonus to the long term performance of the company changes the game completely and is a solution. You may have to wait 5 years to cash out your bonus but everything you do in the job will have a long term focus.
I don't have time to watch a 53-minute YouTube video, but in case you haven't been paying attention, inflation is not a problem in this country right now. Interest rates are at record lows. In fact, rates on some T-bills are negative. This means that people are paying the federal government for the privilege of lending it money.
We could do with a lot more inflation in the near term. It would accelerate economic growth, and it would cause the debt held by many middle-class people to shrink in real terms. This would be good for people with underwater mortgages, massive student loans, or big credit card or medical bills.
Strict anti-inflationism (and the idea that the system is secretly rigged to create inflation) is a viewpoint that tends to be held by gold bugs and other "hard money" obsessives. But inflation is mostly something that hurts people with lots of money. It doesn't hurt ordinary people as much, as long as their incomes keep pace with inflation in the cost of living, and as long as we don't have hyperinflation. And again, inflation actually helps people with debts.
From a macroeconomic perspective, the best thing that both the Fed and the European Central Bank could do right now to jump-start the American and European economies would be to significantly increase inflation.
Source: http://arxiv.org/abs/1107.5728
They investigated the ownership and control of ALL 43,000 trans-national corporations (TNCs), ie ones with business in more than one country:
"We find that, despite its small size, the core holds collectively a large fraction of the total network control. In detail, nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries.
The core is also very densely connected, with members having, on average, ties to 20 other members. As a result, about 3/4 of the ownership of firms in the core
remains in the hands of firms of the core itself. In other words, this is a tightly-knit group of corporations that cumulatively hold the majority share of each other."
This was the first "World Wide Web". The web of corporations that control pieces of each other. The ultimate owners, rich individuals who own stock directly, then control vastly more power through this web than if the companies were truly independent of each other.
The insurance business is HIGHLY regulated. The CEO (and BoD) know EXACTLY what is in their investments because they can only write policies for X times the amount of money they have.
If their investments LOSE money, that means they lose MORE insurance business.
Again, your position seems to require very specific ignorance from the CEO and the BoD.
Yeah, again, again, again. That's VERY specific ignorance required to support your position.
Yeah, again, again, again. That's VERY specific ignorance required to support your position.
The CEO and the BoD didn't know (or bother to learn) what their companies were investing in because there was too much for them to do and the division doing the investing was small (despite being allowed to take on enough debt to kill the company) and even if the CEO did look into it (because he needed to know how much insurance he could issue based upon his investment) he would not have been able to understand it and that would be perfectly okay with him.
Again, again, again. That's VERY specific ignorance required to support your position.
Yes. In fact, I would have a division (possibly called "Accounting" or something) with people dedicated to monitoring it and checking the cash flow. Maybe I'd even have a "C" level executive reporting to me who monitored things like that . Maybe I'd call that person the Chief Financial Officer.
I might even have things I would maybe call "internal audits" just to make sure that the cash / investments were where I thought they should be. To find/prevent something I'd call "embezzlement" (because I like z's).
Again, again, again. That's VERY specific ignorance required to support your position.
"How about if a corporation is awarded death penalty, all its assets would be sold,the proceeds will be distributed to the shareholders, the corporations name, ticker symbols and other trade marks will be sequestered for ever?"
That is nice to say but how about the pension plans, pensioners and widows and for that matter children (etc.) who depend on a corporation for putting food on the table, housing etc?
You will just be forcing them into the public dole.
I would suggest that perhaps making the officers (and other high earners) to be liable for the rest of their lives or until the money is repaid (and at say a nominal rate of 3 percent) and no exemption for bankruptcy. If people are held accountable there will be far less likely to make bad deals(or dishonest ones).