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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 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
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
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.
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.
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,
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
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.
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.
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
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
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?
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.
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
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.
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
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."
Or a community bank.
That will get their attention.
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?
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
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.