I read on BBC yesterday that the richest 62 people in the world now earn as much as the poorest half, which would be about 3.5 billion people! Although there is some confusion about the methodology, it is clear that the wealth and income have been getting more and more polarized. The rich are certainly getting richer. Income inequality is more acute than ever.
الوسم المحفوظات: الانهيار المالي
In Our Defense
The financial crisis was a veritable gold mine for columnists like me. I, لواحد, published at least five articles on the subject, including its causes, و lessons learned, و, most self-deprecating of all, our excesses that contributed to it.
Looking back at these writings of mine, I feel as though I may have been a bit unfair on us. I did try to blunt my accusations of avarice (and perhaps decadence) by pointing out that it was the general air of insatiable greed of the era that we live in that spawned the obscenities and the likes of Madoff. But I did concede the existence of a higher level of greed (أو, more to the point, a more sated kind of greed) among us bankers and quantitative professionals. I am not recanting my words in this piece now, but I want to point out another aspect, a justification if not an absolution.
Why would I want to defend bonuses and other excesses when another wave of public hatred is washing over the global corporations, thanks to the potentially unstoppable oil spill? جيد, I guess I am a sucker for lost causes, much like Rhett Butler, as our quant way of tranquil life with insane bonuses is all but gone with the wind now. Unlike Mr. Butler, لكن, I have to battle and debunk my own arguments presented here previously.
One of the arguments that I wanted to poke holes in was the fair compensation angle. It was argued in our circles that the fat paycheck was merely an adequate compensation for the long hours of hard work that people in our line of work put in. I quashed it, أعتقد, by pointing out other thankless professions where people work harder and longer with no rewards to write home about. Hard work has no correlation with what one is entitled to. The second argument that I made fun of was the ubiquitous “talent” angle. At the height of the financial crisis, it was easy to laugh off the talent argument. بالإضافة إلى, there was little demand for the talent and a lot of supply, so that the basic principle of economics could apply, as our cover story shows in this issue.
Of all the arguments for large compensation packages, the most convincing one was the profit-sharing one. When the top talents take huge risks and generate profit, they need to be given a fair share of the loot. وإلا, where is the incentive to generate even more profits? هذه الحجة فقدت قليلا من عضها عندما الأرباح السلبية (وأعني بالفعل خسائر) يتعين المدعومة. ذكرت هذه القصة كلها لي لشيء أن سكوت أدامز قال ذات مرة من المتقدمين للخطر. وقال ان محتجزي خطر, بحكم التعريف, كثيرا ما تفشل. لذا قم البلداء. عمليا, فمن الصعب تمييزها عن بعضها البعض. يجب على البلداء جني المكافآت وسيم? هذا هو السؤال.
وقد قلت كل هذا في مقالاتي السابقة, الآن حان الوقت للعثور على بعض الحجج في دفاعنا. تركت من أصل واحد حجة هامة في مقالاتي السابقة لأنها لم تدعم فرضيتي العامة — التي كانت مكافآت سخية ليس كل ما مبررة. الآن بأنني تحولت الولاء للقضية خاسرة, اسمحوا لي أن تعرضها على أنها بقوة ما أستطيع. من أجل أن نرى التعويضات ومكافآت الأداء في ضوء مختلف, we first look at any traditional brick-and-mortar company. Let’s consider a hardware manufacturer, على سبيل المثال. Suppose this hardware shop of ours does extremely well one year. What does it do with the profit? بالتأكيد, the shareholders take a healthy bite out of it in terms of dividends. The employees get decent bonuses, نأمل. But what do we do to ensure continued profitability?
We could perhaps see employee bonuses as an investment in future profitability. But the real investment in this case is much more physical and tangible than that. We could invest in hardware manufacturing machinery and technology improving the productivity for years to come. We could even invest in research and development, if we subscribe to a longer temporal horizon.
Looking along these lines, we might ask ourselves what the corresponding investment would be for a financial institution. How exactly do we reinvest so that we can reap benefits in the future?
We can think of better buildings, computer and software technologies etc. But given the scale of the profits involved, and the cost and benefit of these incremental improvements, these investments don’t measure up. Somehow, the impact of these tiny investments is not as impressive in the performance of a financial institution compared to a brick-and-mortar company. The reason behind this phenomenon is that the “hardware” we are dealing with (in the case of a financial institution) is really human resources — الناس — أنت وأنا. So the only sensible reinvestment option is in people.
So we come to the next question — how do we invest in people? يمكننا استخدام أي عدد من نعوت ملطفة, ولكن في نهاية اليوم, ذلك هو بيت القصيد أن تحصي. علينا أن نستثمر في الناس من خلال مكافأة لهم. ماليا. محادثات المال. يمكننا ذلك اللباس بالقول بأننا مكافأة الأداء, تقاسم الأرباح, مواهب الاحتفاظ الخ. ولكن في النهاية, كل ذلك يتلخص في ضمان الإنتاجية المستقبلية, مثل الكثير من الأجهزة متجر لدينا شراء قطعة جديدة يتوهم المعدات.
الآن لابد من طرح السؤال الأخير. الذي تقوم به الاستثمار? من المستفيد عندما إنتاجية (سواء الحالية أو المستقبلية) ترتفع? قد يبدو الجواب واضح جدا للوهلة الأولى — فمن الواضح أنه المساهمين, أصحاب المؤسسة المالية الذين سيستفيدون. ولكن ليس هناك ما هو أبيض وأسود في العالم المظلم من التمويل العالمي. المساهمين ليسوا مجرد حفنة من الناس يحملون قطعة من الورق تثبت ملكيتهم. هناك مستثمرين من المؤسسات, الذين يعملون في الغالب لمؤسسات مالية أخرى. هم الناس الذين ينتقلون قدور كبيرة من المال من صناديق التقاعد والودائع المصرفية ومثل. وبعبارة أخرى, هو الرجل العادي عش البيض, أم لا ترتبط بشكل واضح على الأسهم, التي تشتري وتبيع أسهم الشركات العامة الكبيرة. والرجل هو المشترك الذي يستفيد من التحسينات الإنتاجية الناجمة عن الاستثمارات مثل شراء التكنولوجيا أو دفعات مكافأة. على الأقل, هذا هو نظرية.
هذه الملكية بتوزيع, السمة المميزة للرأسمالية, يثير بعض الأسئلة المثيرة للاهتمام, أعتقد. عندما تدريبات شركة نفط كبيرة لا يمكن وقفها حفرة في قاع البحر, نجد أنه من السهل توجيه غضب دينا في مسؤوليها التنفيذيين, النظر في الطائرات الخاصة فاخر والكماليات الأخرى الضمير أن يسمحوا لأنفسهم. لا ننسى ملائم حقيقة أن كل واحد منا امتلاك قطعة من الشركة? عندما تكون الحكومة منتخبة من دولة ديمقراطية تعلن الحرب على دولة أخرى وتقتل مليون شخص (يتحدث نظريا, بالطبع), يجب أن يقتصر على الإهمال إلى الرؤساء والجنرالات, أو ينبغي أن ترشح وصولا الى الجماهير التي فوضت مباشرة أو غير مباشرة، وعهد القوة الجماعية?
أكثر لهذه النقطة, عندما الصدقات بنك مكافآت ضخمة, ليس هو انعكاس لما لنا جميعا نطالب مقابل استثماراتنا قليلا? ينظر في ضوء ذلك, غير أنه من الخطأ أن دافعي الضرائب في نهاية المطاف كان لالتقاط التبويب عندما ذهب كل شيء الجنوب? أنا بقية حالتي.
المنحدرات الزلقة
لكن, this dictum of denying bonus to the whole firm during bad times doesn’t work quite right either, for a variety of interesting reasons. أولا, let’s look at the case of the AIG EVP. AIG is a big firm, with business units that operate independently of each other, almost like distinct financial institutions. If I argued that AIG guys should get no bonus because the firm performed abysmally, one could point out that the financial markets as a whole did badly as well. Does it mean that no staff in any of the banks should make any bonus even if their particular bank did okay? And why stop there? The whole economy is doing badly. هكذا, should we even out all performance incentives? Once we start going down that road, we end up on a slippery slope toward socialism. And we all know that that idea didn’t pan out so well.
Another point about the current bonus scheme is that it already conceals in it the same time segmentation that I ridiculed in my earlier post. صحيح, the time segmentation is by the year, rather than by the month. If a trader or an executive does well in one year, he reaps the rewards as huge bonus. If he messes up the next year, بالتأكيد, he doesn’t get any bonus, but he still has his basic salary till the time he is let go. It is like a free call option implied in all high-flying banking jobs.
Such free call options exist in all our time-segmented views of life. If you are a fraudulent, Ponzi-scheme billionaire, all you have to do is to escape detection till you die. The bane of capitalism is that fraud is a sin only when discovered, and until then, you enjoy a rich life. This time element paves the way for another slippery slope towards fraud and corruption. مرة أخرى, it is something like a call option with unlimited upside and a downside that is somehow floored, both in duration and intensity.
There must be a happy equilibrium between these two slippery slopes — one toward dysfunctional socialism, and the other toward cannibalistic corruption. It looks to me like the whole financial system was precariously perched on a meta-stable equilibrium between these two. It just slipped on to one of the slopes last year, and we are all trying to rope it back on to the perching point. In my romantic fancy, I imagine a happier and more stable equilibrium existed thirty or forty years ago. Was it in the opposing economic ideals of the cold war? Or was it in the welfare state concepts of Europe, where governments firmly controlled the commanding heights of their economies? إذا كان الأمر كذلك, can we expect China (or India, or Latin America) to bring about a much needed counterweight?
أقسام
مشاركة الأرباح
Among all the arguments for hefty bonuses, the most convincing is the one on profit generation and sharing. Profit for the customers and stakeholders, if generated by a particular executive, should be shared with him. What is wrong with that?
The last argument for bonus incentives we will look at is this one in terms of profit (and therefore shareholder value) generation. جيد, shareholder value in the current financial turmoil has taken such a beating that no sane bank executive would present it as an argument. What is left then is a rather narrow definition of profit. Here it gets tricky. The profits for most financial institutes were abysmal. The argument from the AIG executive is that he and his team had nothing to do with the loss making activities, and they should receive the promised bonus. They distance themselves from the debacle and carve out their tiny niche that didn’t contribute to it. Such segmentation, although it sounds like a logical stance, is not quite right. To see its fallacy, let’s try a time segmentation. Let’s say a trader did extremely well for a few months making huge profits, and messed up during the rest of the year ending up with an overall loss. الآن, suppose he argues, “جيد, I did well for January, March and August. Give me my 300% for those months.” Nobody is going to buy that argument. I think what applies to time should also apply to space (آسف, business units or asset classes, أعني). If the firm performs poorly, perhaps all bonuses should disappear.
As we will see in the last post of the series, this argument for and against hefty incentives is a tricky one with some surprising implications.
أقسام
الاحتفاظ المواهب
Even after we discount hard work and inherent intelligence as the basis of generous compensation packages, we are not quite done yet.
The next argument in favour of hefty bonuses presents incentives as a means of retaining the afore-mentioned talent. Looking at the state of affairs of the financial markets, the general public may understandably quip, “What talent?” and wonder why anybody would want to retain it. That implied criticism notwithstanding, talent retention is a good argument.
As a friend of mine illustrated it with an example, suppose you have a great restaurant thanks mainly to a superlative chef. Everything is going honky dory. ثم, فجأة, an idiot cook of yours burns down the whole establishment. أنت, بالطبع, sack the cook’s rear end, but would perhaps like to retain the chef on your payroll so that you have a chance of making it big again once the dust settles. صحيح, you don’t have a restaurant to run, but you don’t want your competitor to get his hands on your ace chef. Good argument. My friend further conceded that once you took public funding, the equation changed. You probably no longer had any say over payables, because the money was not yours.
I think the equation changes for another reason as well. When all the restaurants in town are pretty much burned down, where is your precious chef going to go? Perhaps it doesn’t take huge bonuses to retain him now.
أقسام
الموهبة والذكاء
In the last post, وذكرت أن مدى صعوبة نعمل ليس لديها الكثير لتفعله مع مقدار المكافأة يجب علينا أن تجني. بعد كل شيء, هناك سائقي سيارات الأجرة الذين يعملون لفترة أطول وأصعب, وحتى النفوس أكثر المؤسفة في الأحياء الفقيرة في الهند وغيرها من الدول الفقيرة.
لكن, أنا خيوط على الجليد الرقيق الحقيقي عندما أقارن, ولكن بشكل غير مباشر, كبار المسؤولين التنفيذيين في سائقو سيارات الأجرة والكلاب الأحياء الفقيرة. They are (المديرين التنفيذيين, هذا هو) من الواضح أن الكثير من الموهوبين, الذي يقودني إلى حجة المواهب الشهير للمكافآت. ما هو هذا الشيء المواهب? هل من الذكاء والتعبير? التقيت مرة واحدة وهو سائق سيارة أجرة في بنغالور الذي كان يجيد أكثر من اثنتي عشرة لغة متباينة مثل العربية والإنجليزية. اكتشفت موهبته خفية عن طريق الصدفة عندما تصدع يصل في شيء والدي قال لي — نكتة خاصة في العامية لدينا, وأنا نادرا ما وجدت محاولة غير الناطقين. لا يسعني التفكير ثم — نظرا مكان آخر وزمن آخر, وهذا من شأنه سائقة تاكسي أجرة كانت أستاذة في علم اللغة أو شيء. موهبة قد يكون شرطا ضروريا للنجاح (ومكافأة), لكنها بالتأكيد ليست كافية. حتى بين الكلاب الأحياء الفقيرة, قد نجد موهبة وافرة, إذا كان الفيلم الحائز على جائزة الأوسكار أي شيء ليذهب بها. رغم أن, بطل الرواية في الفيلم لا تجعل له مليون دولار منحة, ولكنه كان الوحيد الخيال.
في الحياة الحقيقية, لكن, الحوادث الحظ الظروف تلعب دورا أكثر أهمية من المواهب في تضعنا على الجانب الأيمن من الفجوة الدخل. لي, يبدو سخيفا للمطالبة بالحق في المكافآت على أساس أي تصور الموهبة أو الذكاء. تبا, الاستخبارات نفسها, ومع ذلك نعرف أنه, ليست سوى حادث وراثية سعيد.
أقسام
عمل شاق
One argument for big bonuses is that the executives work hard for it and earn it fair and square. It is true that some of these executives spend enormous amount of time (up to 10 إلى 14 hours a day, according the AIG executive under the spotlight here). لكن, do long hours and hard work automatically make us “أولئك الذين يستحقون الأفضل في الحياة,” as Tracy Chapman puts it?
I have met taxi drivers in Singapore who ply the streets hour after owl-shift hour before they can break even. Apparently the rentals the cabbies have to pay are quite high, and they end up working consistently longer than most executives. Farther beyond our moral horizon, human slum dogs forage garbage dumps for scraps they can eat or sell. Back-breaking labour, I imagine. Long hours, terrible working conditions, and hard-hard work — but no bonus.
It looks to me as though hard work has very little correlation with what one is entitled to. We have to look elsewhere to find justifications to what we consider our due.
أقسام
خطط مكافأة من الفئران والرجال
غالبًا ما تخفق خططنا الأفضل,,en,نحن نراها طوال الوقت على المستوى الشخصي,,en,الحوادث,,en,كل الخير والشر,,en,وفاة,,en,كل من أحبائهم وأعمام غنية,,en,ولادة,,en,واليانصيب كل بالتآمر لتعديل أولوياتنا وجعل خططنا لاغية وباطلة,,en,لا يوجد شيء مثل مصيبة صلبة لجعلنا نضع الأمور في نصابها,,en,قد تكون هذه الفرصة هي البطانة الفضية المشهورة التي نصحنا دائمًا برؤيتها,,en,ما هو صحيح على المستوى الشخصي ينطبق أيضا على نطاق أوسع,,en,لقد أدى الانهيار المالي على مستوى الصناعة إلى توضيح فلسفي لمهنتنا,,en,الوضوح الذي ربما كنا مشغولين جدًا بعدم ملاحظته,,en,لكن بالنسبة إلى المضائق الرهيبة التي نعيشها الآن,,en,هذا الوضوح الفلسفي يلهم التحليلات,,en,والأعمدة,,en,التي تخدم في بعض الأحيان الخدمة الذاتية وفي بعض الأحيان البحث عن الذات,,en. We see it all the time at a personal level — accidents (both good and bad), deaths (both of loved ones and rich uncles), births, and lotteries all conspire to reshuffle our priorities and render our plans null and void. في الواقع, there is nothing like a solid misfortune to get us to put things in perspective. This opportunity may be the proverbial silver lining we are constantly advised to see. What is true at a personal level holds true also at a larger scale. The industry-wide financial meltdown has imparted a philosophical clarity to our profession — a clarity that we might have been too busy to notice, but for the dire straits we are in right now.
This philosophical clarity inspires analyses (and columns, بالطبع) that are at times self-serving and at times soul-searching. نحن الآن قلقون بشأن الاستقامة الأخلاقية وراء توقعات المكافأة المجنونة للسنوات الماضية,,en,الحالة في هذه النقطة هو Jake DeSantis,,en,نائب الرئيس التنفيذي في AIG الذي استقال بشكل علني في صحيفة نيويورك تايمز,,en,وتبرع بمكافأته المتواضعة نسبياً بمليون دولار للأعمال الخيرية,,en,الأسباب وراء الاستقالة مثيرة للاهتمام,,en,والعلف لهذه السلسلة من المشاركات,,en,قبل أن أذهب إلى أبعد من ذلك,,en,اسمحوا لي أن أقول ذلك على الفور,,en,سأحاول أن أجاد حججه بأفضل ما أستطيع,,en,أنا متأكد من أنني كنت سونغ لحن مختلفة تماما لو أنها منحت لي مكافأة مليون دولار,,en,أو إذا كان لدى أي شخص ما التساهل في اقتراح أنني جزء من مكافآتي الخاصة,,en,تافهة كما قد تبدو في المقارنة,,en,سأحتفظ بهذا الاحتمال خارج نطاق هذا العمود,,en, على سبيل المثال. The case in point is Jake DeSantis, the AIG executive vice president who resigned rather publicly on the New York Times, and donated his relatively modest bonus of a million dollars to charity. The reasons behind the resignation are interesting, and fodder to this series of posts.
Before I go any further, let me state it outright. I am going to try to shred his arguments the best I can. I am sure I would have sung a totally different tune if they had given me a million dollar bonus. Or if anybody had the temerity to suggest that I part with my own bonus, paltry as it may seem in comparison. I will keep that possibility beyond the scope of this column, تجاهل التناقض الأخلاقي الذي قد يدركه الآخرون بشكل خبيث,,en,سأتحدث فقط عن مكافآت الآخرين,,en,نحن الأفضل في التعامل مع أموال الآخرين,,en,ومن الأسهل دائمًا المخاطرة والتضحية بشيء لا يخصنا,,en,ما هي قيمة وقتك,,en. I will talk only about other people’s bonuses. بعد كل شيء, we are best in dealing with other people’s money. And it is always easier to risk and sacrifice something that doesn’t belong to us.
أقسام
بيت من ورق
We are in dire straits — no doubt about it. Our banks and financial edifices are collapsing. Those left standing also look shaky. Financial industry as a whole is battling to survive. و, as its front line warriors, we will bear the brunt of the bloodbath sure to ensue any minute now.
Ominous as it looks now, this dark hour will pass, as all the ones before it. How can we avoid such dark crises in the future? We can start by examining the root causes, the structural and systemic reasons, behind the current debacle. What are they? In my series of posts this month, I went through what I thought were the lessons to learn from the financial crisis. Here is what I think will happen.
The notion of risk management is sure to change in the coming years. Risk managers will have to be compensated enough so that top talent doesn’t always drift away from it into risk taking roles. Credit risk paradigms will be reviewed. Are credit limits and ratings the right tools? Will Off Balance Sheet instruments stay off the balance sheet? How will we account for leveraging?
Regulatory frameworks will change. They will become more intrusive, but hopefully more transparent and honest as well.
Upper management compensation schemes may change, but probably not much. Despite what the techies at the bottom think, those who reach the top are smart. They will think of some innovative ways of keeping their perks. لا تقلق; there will always be something to look forward to, as you climb the corporate ladder.
Nietzsche may be right, what doesn’t kill us, may eventually make us stronger. Hoping that this unprecedented financial crisis doesn’t kill us, let’s try to learn as much from it as possible.
أقسام
Free Market Hypocrisy
Markets are not free, despite what the text books tell us. In mathematics, we verify the validity of equations by considering asymptotic or limiting cases. Let’s try the same trick on the statement about the markets being free.
If commodity markets were free, we would have no tariff restrictions, agricultural subsidies and other market skewing mechanisms at play. تبا, cocaine and heroine would be freely available. بعد كل شيء, there are willing buyers and sellers for those drugs. في الواقع, drug lords would be respectable citizens belonging in country clubs rather than gun-totting cartels.
If labor markets were free, nobody would need a visa to go and work anywhere in the world. و, “equal pay for equal work” would be a true ideal across the globe, and nobody would whine about jobs being exported to third world countries.
Capital markets, at the receiving end of all the market turmoil of late, are highly regulated with capital adequacy and other Basel II requirements.
Derivatives markets, our neck of the woods, are a strange beast. It steps in and out of the capital markets as convenient and muddles up everything so that they will need us quants to explain it to them. We will get back to it in future columns.
So what exactly is free about the free market economy? It is free — as long as you deal in authorized commodities and products, operate within prescribed geographies, set aside as much capital as directed, and do not employ those you are not supposed to. By such creative redefinitions of terms like “free,” we can call even a high security prison free!
لا تفهموني خطأ. I wouldn’t advocate making all markets totally free. بعد كل شيء, opening the flood gates to the formidable Indian and Chinese talent can only adversely affect my salary levels. Nor am I suggesting that we deregulate everything and hope for the best. Far from it. All I am saying is that we need to be honest about what we mean by “free” in free markets, and understand and implement its meaning in a transparent way. I don’t know if it will help avoid a future financial meltdown, but it certainly can’t hurt.