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End Bonuses For Bankers

Posted by samzenpus on from the end-of-the-gravy dept.

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.'"

36 of 548 comments (clear)

  1. Except that.... by MrNthDegree · · Score: 5, Insightful

    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....

    1. Re:Except that.... by ObsessiveMathsFreak · · Score: 4, Insightful

      Yes, but they won't upset it systemically in the way they do now.

      --
      May the Maths Be with you!
    2. Re:Except that.... by spiffmastercow · · Score: 4, Insightful

      There's nothing in your argument that is even moderately convincing. Give them a straight salary and can their ass if they do a bad job, just like every other profession.

    3. Re:Except that.... by Anonymous Coward · · Score: 4, Insightful

      >. These pay levels are based on the market value of the services that they provide
      No most of these guys can't beat the market they provide ZERO service they're just sitting close to a river of money

    4. Re:Except that.... by Medievalist · · Score: 5, Insightful

      ...it's horrible job with brutal hours and inconceivable stress...

      Bullshit. Their stress is nothing compared to what we routinely ask soldiers, detectives, judges, and other people to do for a fraction of the pay. They hardly ever even get shot at, although that might change if the poor keep getting pushed up against the wall.

      This bs pisses me off. Over privileged drones who voluntarily chose a career of gambling other people's money and got rewarded all out of proportion to their success want sympathy for their ulcers- fuck them. Go tell some single mother fry cook in a ghetto how hard their job is and see how hard she laughs.

    5. Re:Except that.... by SlippyToad · · Score: 3, Insightful

      Thank you. Of course all the inflammatory, nonsensical "bankerz are teh evilz" posts will go +5 informative while you'll sit at 1, but this is really the only reasonable post this discussion will see.

      By asserting what is obvious is not true, you claim "reasonable" discussion?

      This is why people are marching on the banks. Because fucksticks like YOU work so hard to keep the issues muddy when they are really quite clear.

      Bankers are the main cause of our destroyed economy. They have so far failed to hold themselves accountable for that (big laugh), and our system is so rigged that it won't hold them accountable either. So the people are going to the streets to hold them accountable.

      And before you start spewing anymore defensive horseshit, just keep in mind that the reason people are in the streets now is that we've fucking got nothing left to lose, 'cause you and your useless, greedy, lazy banker buddies have taken everything we have.

      --
      One day I feel I'm ahead of the wheel / the next it's rolling over me / I can get back on / I can get back on
    6. Re:Except that.... by martin-boundary · · Score: 3, Insightful

      Taleb's point is that a partnership with unlimited liabilities would never have gotten into the situation Lehman got into.

      That's just theoretical wankery. Remember the joke: An economics professor and his student walk down the street. The student sees a $100 bill on the ground and stoops to pick it up. His professor stops him and says "leave it, it's fake, otherwise somebody would have picked it up already".

      People accept the threat of unlimited liabilities all the time in all sorts of situations. For example, criminals have a threat of life in prison or even the death penalty, and yet they still elect to take the risks. Students take loans that could and probably will take half or more of their lifetime to repay. From the student's POV, that's pretty close to unlimited liability. Soldiers who volunteer to go to war face the threat of being maimed or killed with high probability. That's an unlimited threat of liabilities, and yet millions do it.

      The point is that Taleb's argument is flawed, human nature is vastly different from the rosy ultra-rational toy model that many economists and bankers paint the world to be. Lehman with unlimited liabilities would have behaved essentially exactly the same way.

    7. Re:Except that.... by gizmo_mathboy · · Score: 4, Insightful

      Except that they create nothing of any real value and is of limited utility.

      Finance, Insurance and Real Estate (FIRE) should not be the engine of any economy. It can support and facilitate it but when it becomes the prime mover. Well, then you're just fucked.

      Not sure how Services (flipping burgers, IT support, etc.) fall in there but a service based economy sucks as well.

    8. Re:Except that.... by Chris+Burke · · Score: 5, Insightful

      You also had a law passed in the Carter years to make it easier for people who couldn't (and as we can now see, shouldn't) have been granted a mortgage provided one. This law got itself teeth during the Clinton years to aggressively push these high risk mortgages out there, or the banks would suffer fines. All of this backed up by federally created Fannie Mae and Freddie Mac, who then started bundling these high risk loans with AAA credit loans. All the while, anything that had once been considered wise lending practices were thrown out the window.

      This is horseshit. This is the "blame the poor minorities and the liberals who thought they should be subject to the same standards as everyone else" canard that was trotted out after the collapse to try to divert blame away from the deregulation that is the real obvious cause -- point of fact, even if this bull excrement explanation held any water, had the old rules about the types of securities banks could invest in and the limits to their ability to leverage were in place, the collapse wouldn't have happened.

      The law never required banks to make risky loans. It only required them to not refuse loans based solely on where someone lived, or to use a higher standard to secure the loan than they would for someone who lived somewhere else.

      My bank was subject to the same law, and while so much of the financial sector was collapsing it was fine, because it didn't make risky loans, and it didn't invest in CDOs because the board was smart enough to realize what a crock of shit their ratings were.

      The people who got mortgages but shouldn't weren't just the poor, but the middle class getting mortgages far beyond what they could afford. Not every middle class family should buy a McMansion, but that's not what the loan officers were saying. They knew the loan was risky (or didn't know but didn't care), but they also knew they could turn right around and sell the loan to someone who would package it up with a bunch of others, slap a completely fanciful risk rating on it, and then sell it again to some sap, aka Fannie May, Freddie Mac, Citibank, and all the others who had to be bailed out.

      The only policies that were pushed that caused this disaster are the deregulation The-Free-Market-Knows-Best policies that the banks themselves were pushing for.

      Oh and as far as taking -- the government may be the only one authorized to take in the form of taxes, but the government is only taking a percentage of earnings. When the bankers, in their irresponsible greed, trashed the economy and cost millions their jobs, so they had no earnings. Despite not having the authority, the banks took more than the government did.

      The protesters know who is to blame. The bankers are not middlemen in this mess.

      --

      The enemies of Democracy are
    9. Re:Except that.... by Tom · · Score: 3, Insightful

      disincentive is not getting a bonus.

      If the game where "if you make a profit, you get a bonus, if you break even, you get none", that would be fair. But Taleb's point is that this is not the case. The game is "if you make a profit, you get a bonus. If you make a horrible loss, you get no bonus".

      In other words: The result for the person responsible is either +/- 0 or +(big sum) - no rational person would not take risks given that payoff matrix. Do the math. Taking risk is always the rational choice if you apply game theory. And it doesn't even matter how big the bonus and how big the risk. 10% chance of success, 0.1% chance of success - doesn't matter.

      it's horrible job with brutal hours and inconceivable stress

      I used to work with these people for a short time years ago, and I know people who work in that "industry" right now. Yes, it's not a nine-to-five job and yes, it can be stressful. Compared to fireworkers, soldiers or emergency-room doctors, it's a walk in the part. If you think playing games at the stock exchange is stress, you've never experienced actual stress in your life. If you think spending the day in the office is "brutal hours", you've not spend a night at the hospital, in a burning building or under enemy fire.

      --
      Assorted stuff I do sometimes: Lemuria.org
  2. True to every corporation by Hentes · · Score: 2, Insightful

    This is a fundamental property of capitalism: when a corporation gets lucky it can cash in and when it gets unlucky just go bankrupt.

    1. Re:True to every corporation by xMrFishx · · Score: 5, Insightful

      This is a fundamental property of capitalism: when a corporation gets lucky it can dominate the market so strongly that when it gets unlucky it gets bailed out by the tax payers.

    2. Re:True to every corporation by aintnostranger · · Score: 5, Insightful

      no, that's a property of a failing political system/class. Bail outs are not an automatic thing. They require the complicity of politicians and the complacency of voters.

    3. Re:True to every corporation by wintercolby · · Score: 3, Insightful

      Sorry, this is a fundamental property of being a corporation: Limiting liability so that it can just go bankrupt.

      My wife worked for an attorney whose check would bounce. Every payday there was a dash to the issuing bank. They never paid Medicare or SS taxes to the fed, by the time our slow, lazy revenue office caught up to them, the'd already gone bankrupt and started a new firm. We didn't figure it out until we got one of those medicare statements in the mail.

      In order to have real capitalism there can be no social welfare for the corporation, the executives and board of the companies must be liable for their mistakes. They get paid to take risks, not penalized when risks go bad.

      --
      Most ignorance is vincible ignorance. We don't know because we don't want to know. --Aldous Huxley
    4. Re:True to every corporation by operagost · · Score: 5, Insightful

      Government bailing out corporations? That's definitely not a free-market principle, and we'd all benefit if such ridiculous falsehoods weren't spouted off by every junior blogger. Whether you like capitalism or not, in a pure system a failed company fails and whatever assets it has go to its creditors.

      --

      Gamingmuseum.com: Give your 3D accelerator a rest.
    5. Re:True to every corporation by dslbrian · · Score: 4, Insightful

      Indeed. I heard an interesting argument a week or so ago, where one businessman said that one of the problems with banks in the US is that the government insures all deposits (up to a limit). On it's face it sounded possibly terrifying, can you imagine giving your cash to a banker with no gov't insurance. However since the gov't backs the holdings the banks do not need to operate in a low risk manner with that money, since they know regardless they will get bailed out. It made for an interesting thought, in that if the gov't did not insure any of the holdings you can be sure people would only put their money in a bank with an absolutely solid reputation and no tolerance for risk.

      There was a similar argument I heard a few years ago regarding insurance companies, in that they also have large holdings which they were investing in ever more risky ventures. The fact that the gov't backs up all deposits implicitly indicates their distrust in the banking system (after all, if it were trustworthy, why would it need backing), but yet they do things like repeal Glass–Steagall which encourages ever more risky behavior. There is a lot the gov't could do to rein in bad bank and investment behaviors. After all if things like derivatives are indeed equivalent to financial mass destruction tools, why not ban them outright. Just because things can be done, doesn't mean they should be allowed.

  3. It's not a complete solution yet... by javakah · · Score: 4, Insightful

    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.

    1. Re:It's not a complete solution yet... by Lemmy+Caution · · Score: 5, Insightful

      When you see who holds and manages those shares and who has voting rights, you'll understand just what a predicament we're in. You're asking the people who are sitting on the money to stop writing themselves checks. They won't.

  4. This is one of those by Compaqt · · Score: 4, Insightful

    "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
  5. Corporations are people. Death penalty to corps? by 140Mandak262Jamuna · · Score: 5, Insightful
    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.

    --
    sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
  6. Wrong Headed by Anonymous Coward · · Score: 2, Insightful

    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.

  7. reinstate Glass-Steagall instead by Anonymous Coward · · Score: 2, Insightful

    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.

  8. Re:Clawback, not end by Lemmy+Caution · · Score: 4, Insightful

    Do surgeons get paid "bonuses" for successful surgeries?

    The incentive for success should be "continue to draw a paycheck, perhaps get a raise/promotion, and not get fired." That's what it is for most of the rest of us.

  9. Novel concept, that by overshoot · · Score: 4, Insightful
    Oh, wait. Up until relatively recently, the finance industry was dominated by partnerships and LLCs, with the management being primarily owners of the firm. The prospect of a lifetime's work going up in smoke is a very serious disincentive to risk-taking, and in fact "risk management" was a huge part of what they did.

    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, /. substitutes moderation as "Troll."
  10. Re:Corporations are people. Death penalty to corps by 140Mandak262Jamuna · · Score: 3, Insightful
    When we execute a human being, we pay the restitution out of the condemned prisoner's estate. Anything remaining goes to the legal heirs. Same way the shareholders are the legal heirs to the corporations assets. Let them get back anything that remains after paying the restitution.

    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
  11. Re:Corporations are people. Death penalty to corps by Anonymous Coward · · Score: 2, Insightful

    I vote we start chasing them into the sewer pipes and just save ourselves some time.

  12. Risk is in the eye of the behold by davidwr · · Score: 3, Insightful

    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.
  13. Re:Corporations are people. Death penalty to corps by religious+freak · · Score: 3, Insightful

    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
  14. s/capitalism/cronyism by Anonymous Coward · · Score: 5, Insightful

    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?

  15. Re:Clawback, not end by compro01 · · Score: 4, Insightful

    Instead of taking away wealth creation from the companies that succeed, why not punish those who fail by not bailing them out? Your business fails you go out of business, pretty simple process actually.

    Too big to fail is a big fat lie.

    The issue is that you're "punishing" the fictional person, rather than the actual person making the decisions, and thus the entire "simple process" fails completely in achieving its goal.

    --
    upon the advice of my lawyer, i have no sig at this time
  16. Re:Clawback, not end by wintercolby · · Score: 3, Insightful

    Do sys admins get bonuses that are multiples of their annual salary for system reliability and security? The problem is exactly how you put it. Most of us have a disincentive to perform our jobs poorly, and our incentives are a small percentage of our income. Bankers and executives should be the same. Instead they get bonuses for taking huge risks with our economies and our employment. Perhaps the rock-star CEOs that demand an exorbitant salary aren't worth hiring in the first place.

    --
    Most ignorance is vincible ignorance. We don't know because we don't want to know. --Aldous Huxley
  17. Re:Exactly by phantomfive · · Score: 5, Insightful

    The problem of "too big to fail" is simple to solve by following this principle: any bank that is too big to fail is also to big to exist. Thus any bank that receives government money must be either closed down or broken up and sold in pieces.

    This is the solution proposed by Paul Volcker, and for my money it is the correct one.

    --
    "First they came for the slanderers and i said nothing."
  18. Transfer your money to a credit union by walterbyrd · · Score: 3, Insightful

    Or a community bank.

    That will get their attention.

  19. Re:Exactly by Jibekn · · Score: 4, Insightful

    I agree with the other poster, as soon as you're "Too Big to Fail" your company should be seized, nationalized, broken up and sold. The ONLY institutions that should have the power to bring the world to its knees like this last crisis did, is governments, and even then im not a big fan. But I feel MUCH better with that power in the hands of my government, than with a private citizen.

    Think of it from a military point of view, If my company had a private security force, that rivaled the US/Chinese military, would they let me keep it? Then why the fuck is a company allowed to wield the same economic power?

  20. Re:Exactly by humphrm · · Score: 5, Insightful

    Funny how historic problems repeat themselves, and we let it. East India Company was so big and its reach so massive that it had it's own flag, its own military, and its administrative section was larger than most governments. Eventually even government officials, who were quite comfortable with someone else managing their nasty colonial duties, began to realize that they had outgrown their own britches and started systematically taking them apart.

    --
    -- "In order to have power, I must be taken seriously." -Mojo Jojo
  21. Re:Quit the generalization crap by Vancorps · · Score: 3, Insightful

    You're funny, you were insightful until you started calling the President a liar. How do you reconcile that despite Goldman Sachs people being brought in, that the President actually did propose to congress what he promised while campaigning and he's met nothing but staunch opposition from Republicans who's stated goals are to make him, the President of the United States fail. You should probably look at the number of proposals the executive office has put forward to the legislators only to have little to no progress in return even when it is their own proposals.

    So rather than trying to portray the issue as black and white and cloud the problems with the banking industry by blaming government maybe you should realize that both are messed up and in need of serious reform, reform that McCain as a Republican proposed during the Clinton years with compaign finance reform. Then there is the need to put taxes back to where they were in the Clinton era, then put Glass Steagel back in for regulation of the financial sector and you start the process of developing a sane road to real recovery.

    I look forward to the day when we can have rational debates that don't involve Republican versus Democrats and instead revolve around actual problems that need solving, like alternatives for oil, infrastructure rebuilding, energy generation, healthcare, and the myriad of other actual problems.