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Math The Almighty Buck Science

End Bonuses For Bankers 548

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.'"
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End Bonuses For Bankers

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  • Except that.... (Score:5, Insightful)

    by MrNthDegree ( 2429298 ) on Wednesday November 09, 2011 @03:45PM (#38003146)

    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....

    • Re:Except that.... (Score:5, Insightful)

      by ObsessiveMathsFreak ( 773371 ) <> on Wednesday November 09, 2011 @03:52PM (#38003252) Homepage Journal

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

      • Re:Except that.... (Score:5, Interesting)

        by Ex-MislTech ( 557759 ) on Wednesday November 09, 2011 @04:55PM (#38004294)

        Well they are doing exactly what they were meant to do just
        like the 21 other instances of major inflation in the past 25 years.

        As John Perkins clearly explains the economic destruction of
        nations has been by design. []

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

        Since the systematic disruption is largely due to conflicts of interests (many of which are directly enabled by the elimination, in the 1990s, of regulations imposed in response to the same conflicts and their contribution to the previous economic dislocations) that affect financial services firms and not bonuses paid to individual executives, eliminating bonuses paid to individual executives is unlikely to stop the systematic disruption.

        It mi

      • Re:Except that.... (Score:4, Insightful)

        by Anonymous Coward on Wednesday November 09, 2011 @04:31PM (#38003852)

        >. 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

      • 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.

        • Re:Exactly (Score:5, Insightful)

          by phantomfive ( 622387 ) on Wednesday November 09, 2011 @05:02PM (#38004420) Journal
          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.
        • Re:Exactly (Score:4, Insightful)

          by Jibekn ( 1975348 ) on Wednesday November 09, 2011 @05:27PM (#38004886)
          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?
          • Re:Exactly (Score:5, Insightful)

            by humphrm ( 18130 ) on Wednesday November 09, 2011 @07:02PM (#38006110) Homepage

            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.

      • Re:Except that.... (Score:5, Interesting)

        by quarterbuck ( 1268694 ) on Wednesday November 09, 2011 @04:47PM (#38004150)
        True, but I think Taleb's point was to cut both Bonuses and Salaries to make Bankers "Lifers". He explicitly points out that a lot of banking employees would leave, and hedge funds (which need not be bailed out) will pick up the risk that banks lay off.
        I believe this is how it would work out according to Taleb.
        1) Banks cut salaries/bonuses
        2) Lot of workers leave
        3) The banks can't do much else other than old fashioned banking
        4) Hedge funds partnership based pick up all the "cool stuff"
        5) Since partnerships and hedge funds do not have "Limited Liability" , they are much more careful
        The Atlantic article is incorrect in using the Lehman example. Taleb's point is that a partnership with unlimited liabilities would never have gotten into the situation Lehman got into. He does not say that Lehmans corporate structure mattered in any way after Lehman got into the situation it did.
        Unlimited liability + Bonus is a very different incentive compared to Limited liability + Salary which are both better than Limited liability + Bonus.
        If you were a trader who could do a billion dollar trade that had 50% chance of winning that would fetch you a million dollar bonus and 0 liability (except loss of job which pays you 100K a year), you would likely take the trade if you thought of sticking to the job only for 5 years. But you would be less likely to take it if you had unlimited liability.
        • Re:Except that.... (Score:4, Insightful)

          by martin-boundary ( 547041 ) on Wednesday November 09, 2011 @05:21PM (#38004746)

          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.

      • Re:Except that.... (Score:5, Insightful)

        by gizmo_mathboy ( 43426 ) on Wednesday November 09, 2011 @05:47PM (#38005238)

        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.

      • Translation: His friends in the business like their bonuses.

        Imagine your contract gives you 10% of what profits you make for your company during a calendar year. But it's December 31, and your balance is at zero, you're looking at no bonus at all. Now, if you could take $1M of the company's money to the casino and put everything on red, would you do it?

        Of course you would, if you live only for money, as Daniel Indiviglio suggests. You have an 18/38 chance of winning with a $100K bonus to follow. And you h

    • by walterbyrd ( 182728 ) on Wednesday November 09, 2011 @05:16PM (#38004646)

      Or a community bank.

      That will get their attention.

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

    • by xMrFishx ( 1956084 ) on Wednesday November 09, 2011 @03:50PM (#38003204)
      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.
      • by aintnostranger ( 1811098 ) on Wednesday November 09, 2011 @04:07PM (#38003480)
        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.
        • You know...I'll be concerned about private banks' soon as the bonuses for failure at somewhat public failures like Fannie and Freddie are addressed.

          They want morebail out money this year and are planning to give out something like $13M in bonuses?

          Let's clean the federal house first....

          • by x0 ( 32926 ) on Wednesday November 09, 2011 @04:49PM (#38004182) Homepage

            cayenne8 (626475)

            You know...I'll be concerned about private banks' soon as the bonuses for failure at somewhat public failures like Fannie and Freddie are addressed.

            They want more bail out money this year and are planning to give out something like $13M in bonuses?

            Let's clean the federal house first....

            You silly person. The only way to fix this is to tax the rich. Cutting spending, and spending wisely are obviously racist conspiracies.


            • Politicians won't tax themselves. You would be hard pressed to find a single elected official who was middle-class let alone poor. In fact, I would say this applies to every single western democracy. No, I blame the voter for sitting on their ass deaf dumb and blind all while pulling the level for PartyX come election time. You know....fuck it. STOP! I want off this planet.

        • Maybe. But total Market domination is certainly a feature of capitalism. Once you hit that point the only way out is to break it down carefully or nationalise it. You can't have a monopoly for profit ultimately without screwing over your population. You can regulate to prevent it getting dug in that deep and keep competition open but there are lines that get crossed that are almost irreversible.
          • by Shotgun ( 30919 ) on Wednesday November 09, 2011 @04:56PM (#38004314)

            Let me get this logic straight:

            -A corporation gets so large that it is literally able to warp the space/time continuum of political power. They are able to buy off the puppet politicians and get whatever laws they want passed.

            -One of your answers to this situation is to have the puppet politicians take complete control of the corporation. The other is for the puppet politician to break his master into pieces.

            Would removing the ability of the puppet politician to work on behalf of his corporate overload be an option?

      • by Attila Dimedici ( 1036002 ) on Wednesday November 09, 2011 @04:14PM (#38003576)
        That is not a property of capitalism. As someone else has pointed out that is a property of a political system wherein certain groups of people ask the political class to exercise more power every time there is a problem that results from the political class abusing its power.
        • by An Onerous Coward ( 222037 ) on Wednesday November 09, 2011 @04:25PM (#38003750) Homepage

          I'd say that this is a property of a certain subset of capitalism where influence of the political system is treated as any other good. That is to say, buy what you can afford, at whatever price it's worth to you.

          The libertarian approach is to weaken government to the point where it can no longer aid corporations in their corruption. The liberal approach is to not treat it as a free market good. I can't for the life of me figure out what the conservative approach is. Seems to be, "What's the problem again?"

      • by Anonymous Coward on Wednesday November 09, 2011 @04:16PM (#38003598)

        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?

      • by operagost ( 62405 ) on Wednesday November 09, 2011 @04:16PM (#38003612) Homepage Journal
        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.
      • by dslbrian ( 318993 ) on Wednesday November 09, 2011 @04:26PM (#38003758)

        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.

      • The problem is, the elite gather so much wealth, they're able to bribe the politicians into bailing them out with tax payer's money.
    • Re: (Score:2, Offtopic)

      Fundamental property of *corporatism* maybe, but not capitalism. True capitalism doesn't have bankruptcy laws, they're considered an immoral government interference in the organized crime, er, marketplace.

    • by wintercolby ( 1117427 ) <winter.colby@[ ] ['gma' in gap]> on Wednesday November 09, 2011 @04:14PM (#38003584)
      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.
    • by Anonymous Coward on Wednesday November 09, 2011 @04:17PM (#38003614)

      This is not true.

      Historically, corporations were required to be non-profit and demonstrate that their existence served the public good to be registered.

      "In the United States, government chartering began to fall out of vogue in the mid-19th century. Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters."

      You believe that the way things operate are fundamental because you were programmed to believe that by those who have been exploiting you since you were born.

  • by javakah ( 932230 ) on Wednesday November 09, 2011 @03:46PM (#38003158)

    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.

  • by Compaqt ( 1758360 ) on Wednesday November 09, 2011 @03:47PM (#38003170) Homepage

    "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.

    • Money in the form of INTEREST when they make loans. The more interest you can get, the more profitable your bank is.

      • alas, that only works to a point. When your loanee fails to repay the loan (because, maybe you lent against an asset that no longer appreciates in price) then you interest repayments are dwarfed by the subsequent write-off.

        You could say, from nothing comes nothing, but as the bank reports the loan's "value" as part of their assets and has claimed bonuses based on these large increases in bank revenue... it becomes difficult to say "oh well, we never had that money in the first place" as they gave it to empl

  • Clawback, not end (Score:5, Interesting)

    by DeadCatX2 ( 950953 ) on Wednesday November 09, 2011 @03:47PM (#38003172) Journal

    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.

    • Re:Clawback, not end (Score:4, Interesting)

      by ObsessiveMathsFreak ( 773371 ) <> on Wednesday November 09, 2011 @03:56PM (#38003310) Homepage Journal

      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.

      You are implying a fallacy here. How can someone be rewarded for a success, if that success is later revealed to be a failure. The root cause of much (all?) of the financial crisis was that people were being encouraged, financially, to make trades that would cause their firms to fail.

      It is pointless(and futile) to try to claw back the bonuses after the damage has already been done. You have to prevent damage in the first place, and that means not incentivising people to cause it.

      Bonus have to go.

    • by Lemmy Caution ( 8378 ) on Wednesday November 09, 2011 @03:59PM (#38003368) Homepage

      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.

      • by wintercolby ( 1117427 ) <winter.colby@[ ] ['gma' in gap]> on Wednesday November 09, 2011 @04:29PM (#38003826)
        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.
    • Re:Clawback, not end (Score:4, Interesting)

      by Catiline ( 186878 ) <> on Wednesday November 09, 2011 @04:00PM (#38003378) Homepage Journal

      Another option would be to hold all bonuses in escrow for some defined period (I would suggest at least 5 years). At the end of that period, the bonus may be claimed.

      This would work at least as well for stock based bonuses for CxO level officers; now they have a direct financial incentive to ensure the company will shine just as well after they leave as they do shine up the numbers for next quarter.

      • Good idea in theory, but in practice, only a fool would take such a contract.

        There's too many ways that Creative/Hollywood accounting could make the five year away bonus disappear. Look to Silicon valley for examples of the vanishing bonus.

        Most high level people are practically guaranteed their bonuses, as long as they keep breathing. VPs are routinely paid millions when they get fired.

        If you did create a utopia bank that worked properly, your shareholders would eventually sell out, and it wou
    • That only addresses fraud. It does not place any punishment on being stupid or lazy. For instance AIG. The vast majority of AIG's business is insurance and it does a decent job. The relatively small department that was handling securities brought the company down because they were leveraged far more than the value of the company's assets. The only reason they went into the subprime mortgage business was that they saw that players like Goldman Sachs were making a lot of money. However they didn't real
    • by suutar ( 1860506 )
      The problem is not directly the lack of disincentive for failure, it's the lack of balance. Adding clawbacks would penalize failure, but only if they get caught and only if they still have the money, and the bonus/clawback system is still a positive feedback. Negative feedback principles dictate that we remove causes before we add retribution; that is, rather than add an after-the-fact penalty that may not be enforceable, try to make it less desirable before the fact by removing the bonus.
  • by 140Mandak262Jamuna ( 970587 ) on Wednesday November 09, 2011 @03:48PM (#38003190) Journal
    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.

    • by 140Mandak262Jamuna ( 970587 ) on Wednesday November 09, 2011 @03:54PM (#38003276) Journal
      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.
    • Why give the assets to the stock holders? Confiscate them as a fine.

      • by 140Mandak262Jamuna ( 970587 ) on Wednesday November 09, 2011 @04:03PM (#38003432) Journal
        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.

    • by Surt ( 22457 )

      Yep, corporate death penalty is the right way forward. Which is why it will never happen.

    • Re: (Score:2, Insightful)

      by Anonymous Coward
      I vote we start chasing them into the sewer pipes and just save ourselves some time.
    • by religious freak ( 1005821 ) on Wednesday November 09, 2011 @04:07PM (#38003482)
      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?
      • by 140Mandak262Jamuna ( 970587 ) on Wednesday November 09, 2011 @04:26PM (#38003760) Journal
        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.
    • "I'll believe corporations are people when Texas executes one."
    • by crovira ( 10242 )

      "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 wi

  • by Khashishi ( 775369 ) on Wednesday November 09, 2011 @03:51PM (#38003226) Journal

    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.

    • The more people that move their money to Credit Unions and non-profit mutal funds the more difficult it's going to be for bankers to get money for bonuses.

  • 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

  • Wrong Headed (Score:2, Insightful)

    by Anonymous Coward

    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.


  • by ackthpt ( 218170 ) on Wednesday November 09, 2011 @03:54PM (#38003282) Homepage Journal

    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.

    • by suutar ( 1860506 )
      I thought psychology had determined that we work best when we're doing the work because we enjoy it, not because we're getting rewarded for it.
      • Thank you! []

        Another thing to keep in mind is that the law of diminishing returns applies to dollars as well as anything else. Moving from $500/year to $5000/year is a big friggin deal. A proportional move from $10M/year to $100M/year doesn't have much effect on how you personally live, since you can already buy pretty much whatever strikes your fancy. When you get above, say, $1M/year, money stops being about improving your quality of life and starts to be a way

  • 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.

  • by Anonymous Coward

    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.

    • Exactly. Reinstate the regulations that kept a wall between the types of banks. And while you're at it, reinstate the regulations that limit how far out on a limb you can go.

      The problem isn't that banks take risk. That's what they do. The key is to keep them from taking stupid risk that exposes so much of the economy. Taking away bonuses from the bankers won't keep them from doing that. Reinstating the regulation (that was ripped down for the last 20 years with full bipartisan support) is what we need

  • by SuperKendall ( 25149 ) on Wednesday November 09, 2011 @03:57PM (#38003336)

    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.

  • by overshoot ( 39700 ) on Wednesday November 09, 2011 @04:00PM (#38003370)
    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.

  • by MetricT ( 128876 ) on Wednesday November 09, 2011 @04:03PM (#38003426)

    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.

  • by gurps_npc ( 621217 ) on Wednesday November 09, 2011 @04:04PM (#38003442) Homepage
    As per a bolg post I made back in October (What the Wall Street Protestors Should Demand [], we need to change the bonus structure so that they are paid out over a long time period - say 4 years.

    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.

  • by davidwr ( 791652 ) on Wednesday November 09, 2011 @04:05PM (#38003458) Homepage Journal

    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.

  • by rsilvergun ( 571051 ) on Wednesday November 09, 2011 @04:05PM (#38003460)
    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.
  • "risk engineering prof"?

  • by sl4shd0rk ( 755837 ) on Wednesday November 09, 2011 @04:17PM (#38003632)

    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.

  • by dpilot ( 134227 ) on Wednesday November 09, 2011 @04:22PM (#38003708) Homepage Journal

    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.

"You can have my Unix system when you pry it from my cold, dead fingers." -- Cal Keegan