re INTERESTING Re: Banks Set for Record Pay - 18% over last year!!

[Dave Farber <dave () farber net>]

Begin forwarded message:

> From: Ken Kousky <kkousky () ip3inc com>
> Date: January 17, 2010 3:14:05 PM EST
> To: dave () farber net, 'ip' <ip () v2 listbox com>
> Subject: RE: [IP] INTERESTING Re: Banks Set for Record Pay - 18%  
> over last year!!

> These are great points BUT, as an economist, it kills me to hear  
> these discussions evolve from the belief that compensation in  
> banking and/or health care are the results of the free market  
> capitalistic process. NOTHING could be further from the truth.  
> Incomes in healthcare are the byproduct of a third-party payer  
> system that corrupts most aspects of free market resource allocation  
> and certainly of income determination. In health care it’s what’s  
> reimbursable that determines compensation.
>
>
>
> A far more profound distortion occurs in the financial system where  
> the trading desks account for the bulk of the income, the greatest  
> share of the bonuses and the primary responsibility for the melt- 
> down of the financial system. We should be asking for damages from  
> these institutions,  not just about the TARP dollars, but for much  
> of the other stimulus costs.
>
> The idea has been used in the past and should be sent to Wall Street  
> again. Bonuses should all be paid with toxic assets – maybe a few cr 
> edit default swaps and the rest in long term stock options.
>
>
>
> KWK
>
>
>
> From: David Farber [mailto:dave () farber net]
> Sent: Sunday, January 17, 2010 12:39 PM
> To: ip
> Subject: [IP] INTERESTING Re: Banks Set for Record Pay - 18% over  
> last year!!
>
>
>
>
>
>
>
> Begin forwarded message:
>
>
>
> From: Rahul Tongia <tongia.cmu () gmail com>
>
> Date: January 17, 2010 12:30:35 PM EST
>
> To: dave () farber net
>
> Subject: Re: [IP] INTERESTING Re: Banks Set for Record Pay - 18%  
> over last year!!
>
>
> [this is a resend due to possible email issues - thx]
>
> Dave,
>
> I wouldn't necessarily use words like "crime" - it's a manifestation  
> of limited transparency, limited choices, and limited *employment*  
> "liquidity" which leads to the high pay scales for the "geniuses" in  
> finance.
>
> YES, they have a contract with certain bonus claims.  Gee, manage/ 
> manipulate/achieve the targets for a quarter and get massive bonuses  
> - cha-ching. What about long-term value? Sustainable growth?
>
> The problem is, to me, very similar to medicine where we have super- 
> super specialists in fields including cosmetic surgery (or even  
> cardiac surgery) making 10x what a pediatrician or family medicine  
> or even internist makes.  If you claim, oh, supply and demand,  
> you're missing the complete lack of equilibrium at stake.  More than  
> such a thing, at a SOCIETAL level, society needs more doctors of the  
> latter ilk (not to mention nurses). But med students don't want  
> those specializations in part cause the pay is low (and they have  
> debt), and the "stigma" that they weren't good enough to get the  
> super specialization residencies.  Will the market increase the  
> salaries for the needed doctors? They haven't much in the last few  
> years.
>
> The market does work for doctors in some ways - when a family member  
> was choosing where to work after finishing residency, salaries for  
> NYC were half those of rural America - supply and demand. But he was  
> a specialist.  Incentives weren't quite as strong for the family  
> medicine types of fields.
>
> SO, if society would be *better off* (net social welfare) with more  
> general/primary care physicians, and we're not getting them, then we  
> need to (gasp) intervene. Something as simple as interest free loans  
> or partial debt forgiveness are some options.
>
> Thus far, I haven't gotten to the issue of whether certain finance  
> jobs are worth the high salaries (including bonuses).  For those who  
> think we need less of such jobs, maybe ending such bonuses is the  
> market signal that will make sure less people go into that field.   
> One could counter that lower salaries would reduce the incentives  
> for the best and the brightest to join that field.  First of all, I  
> would posit that the people in such jobs aren't the best and the  
> brightest society produces. Second, even if they are, their  
> motivation is financial profit maximization (and self-earning, like  
> all people). The system isn't set up to make sure that societal  
> benefit aligns with such goals.
>
> Rahul
>
> On Sun, Jan 17, 2010 at 10:12 PM, Dave Farber <dave () farber net> wrote:
>
>
>
>
>
> Begin forwarded message:
>
> From: Mary Shaw <mary.shaw () gmail com>
> Date: January 17, 2010 1:26:27 AM EST
> To: dave () farber net
> Subject: Re: [IP] INTERESTING Re: Banks Set for Record Pay - 18%  
> over last year!!
>
> Yes, but ...
>
> Let's step back from the details and ask whether, compared to other  
> professionals, these people are worth what they're being paid.
>
> Are the skills involved in manipulating financial instruments more  
> refined and more critical to society than, say, doctors, nurses,  
> police, teachers, ... ?  Really?  By orders of magnitude?
>
> Something is out of whack.  We're not going to find or fix it by  
> microanalyzing bonuses vs salaries for huge total payouts.
>
> Mary Shaw
>
> On Fri, Jan 15, 2010 at 12:52 PM, Dave Farber <dave () farber net> wrote:
>
>
>
>
>
> Begin forwarded message:
>
> From: Joe Faber <joseph.faber () gmail com>
> Date: January 15, 2010 12:28:28 PM EST
> To: ip <ip () v2 listbox com>, dave () farber net
> Subject: Re: [IP] Re: Banks Set for Record Pay - 18% over last year!!
>
> These are complicated issues that folks are trying to tie together.  
> They involve not just home loans, but complex derivative products  
> and trading strategies, financial speculation, etc.
>
> "Banks" didn't steal from the rest of us. A lot of them did  
> underwrite loans that they shouldn't have. Some of this was the  
> banks fault (e.g., lax underwriting standards at places like  
> Countrywide and American Home Mortgage). Remember, it wasn't that  
> long ago that most people felt they had a right to own a home. Whose  
> fault is that? Mortgage brokers? Depository banks? Investment banks?  
> Home owners with unrealistic aspirations? Let's not forget all the  
> "no doc" loans in which 3rd party mortgage brokers blatantly lied to  
> banks about the financial condition of the buyers so that  
> individuals who would never qualify for loans wound up getting them.
>
> Now, let's talk about who's getting these huge bonuses for a second  
> - in general the folks who are getting them are not the ones who  
> underwrote the bad loans. And some of the large TARP recipients  
> (like Wells Fargo) are not the ones paying out the outsized bonuses  
> anyway... Yes, the investment banks packaged and sold CDOs (made up  
> in many cases of lousy mortgages) - and there are many entities to  
> blame for that (rating agencies, the original banks that issued the  
> loans, investment banks, etc) - but a lot of the other bankers are  
> being paid large bonuses because of things like the record corporate  
> bond issuances this year, traditional M&A fees, and trading  
> revenues  - elements that make up the basic blocking and tackling  
> that investment banks do on a daily basis.
>
> In general, bonuses have traditionally made up the majority of a  
> bankers' compensation because a) the business is highly competitive  
> and employees are motivated by potential financial gain as opposed  
> to simple altruism, b) tying pay to performance is better than  
> having it completely disconnected from performance, and c) the value  
> in financial services is not in things like patents or market share,  
> but instead in human capital that is prone to walk out the door, d)  
> investment banks have transitioned from partnership structures  
> (where the partner share in the profits) to public companies -  
> consequently, the majority of revenue and profits needed to be  
> redirected from shareholders to employees. Any firm that continued  
> to send the majority of profits to shareholders would be at a  
> serious competitive disadvantage relative to those firms that didn't.
>
> Finally, if folks are looking for folks to blame (or at least deep  
> pockets that profited tremendously while others suffered), perhaps  
> spending a bit of time looking at hedge funds might be warranted.  
> How or why did the price of oil get so disconnected from basic  
> supply/demand fundamentals? How is it that Paulson & Co (the hedge  
> fund, not Hank) could profit to the tune of billions from shorting  
> banks (thereby further eroding the public confidence in banks and  
> helping necessitate the public bailout in the first place)? Don't  
> get me wrong, I'm not saying that the hedge funds who profited at  
> the expense of "the rest of us" necessarily were breaking the law,  
> but the situation is complicated and rife with conflicts of interest  
> at the very least.
>
> In ponzi schemes, no one hesitates to blame the law breakers.  
> Everyone can and should blame Bernie Madoff for what he did. But  
> these other situations are not so clear-cut. Yes, there were lots of  
> conflicts and poorly designed incentive systems, and many people  
> made lots of money at the expense of others, but sorting through all  
> the mess ain't easy, and neither is coming up with solutions to  
> address the system's faults that have been identified.
>
>
> On Fri, Jan 15, 2010 at 11:19 AM, Dave Farber <dfarber () me com> wrote:
>
> >From: "Jonathan S. Shapiro" <shap () eros-os org>
> >To: <dave () farber net>
> >Cc: "ip" <ip () v2 listbox com>
> >Date: January 15, 2010 11:11:49 AM EST
> >Subject: Re: [IP] Re: Banks Set for Record Pay - 18% over last year!!
> >
> >
>
>
> They *did* steal from us, and it has nothing to do with house  
> valuations or trend lines. It's very simple: the banks wrote bad  
> loans in the full knowledge that they would be bailed out by the  
> government using taxpayer money. That money ultimately comes out of  
> your pocket and mine. I don't know about you, but *I* wasn't a party  
> to those loans, and I certainly wouldn't have approved loans to  
> people who self-evidently lacked the means to pay. When somebody  
> contrives to reach into your pocket and take your money without your  
> consent, what do *you* call it? I call it theft.
>
>
>
> You are correct that there are contracts requiring that the banks  
> pay the participants according to certain formulae. And I'm happy if  
> we do that, so long as we prosecute the parties involved. We can  
> then seize the bonuses as income derived from crime, which is the  
> treatment it deserves.
>
>
>
> The tragedy here is that when everybody is responsible, nobody is  
> responsible, and nobody can be held accountable.
>
>
>
>
>
> Jonathan
>
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