Tag Archives: financial meltdown

Income Inequality

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.

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In Our Defense

The financial crisis was a veritable gold mine for columnists like me. I, for one, published at least five articles on the subject, including its causes, o lessons learned, e, 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 (ou, 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? Bem, 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, no entanto, 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, Eu acho que, 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 “talento” ângulo. At the height of the financial crisis, it was easy to laugh off the talent argument. Além, 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. Caso contrário, where is the incentive to generate even more profits? This argument lost a bit of its bite when the negative profits (by which I indeed mean losses) needed to be subsidized. This whole saga reminded me of something that Scott Adams once said of risk takers. He said that risk takers, por definição, often fail. So do morons. Na prática, it is hard to tell them apart. Should the morons reap handsome rewards? That is the question.

Having said all this in my previous articles, now it is time to find some arguments in our defense. I left out one important argument in my previous columns because it did not support my general thesis — that the generous bonuses were not all that justifiable. Now that I have switched allegiance to the lost cause, allow me to present it as forcefully as I can. In order to see compensation packages and performance bonuses in a different light, we first look at any traditional brick-and-mortar company. Let’s consider a hardware manufacturer, por exemplo. Suppose this hardware shop of ours does extremely well one year. What does it do with the profit? Com certeza, the shareholders take a healthy bite out of it in terms of dividends. The employees get decent bonuses, esperançosamente. 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. De alguma maneira, 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 — pessoas — você e eu. So the only sensible reinvestment option is in people.

So we come to the next question — how do we invest in people? We could use any number of euphemistic epithets, but at the end of the day, it is the bottom line that counts. We invest in people by rewarding them. Monetarily. Money talks. We can dress it up by saying that we are rewarding performance, sharing profits, retaining talents etc. Mas em última análise,, it all boils down to ensuring future productivity, much like our hardware shop buying a fancy new piece of equipment.

Now the last question has to be asked. Who is doing the investing? Who benefits when the productivity (whether current or future) goes up? The answer may seem too obvious at first glance — it is clearly the shareholders, the owners of the financial institution who will benefit. But nothing is black and white in the murky world of global finance. The shareholders are not merely a bunch of people holding a piece of paper attesting their ownership. There are institutional investors, who mostly work for other financial institutions. They are people who move large pots of money from pension funds and bank deposits and such. Em outras palavras, it is the common man’s nest egg, whether or not explicitly linked to equities, that buys and sells the shares of large public companies. And it is the common man who benefits from the productivity improvements brought about by investments such as technology purchases or bonus payouts. Finalmente, that is the theory.

This distributed ownership, the hallmark of capitalism, raises some interesting questions, Eu acho que. When a large oil company drills an unstoppable hole in the seabed, we find it easy to direct our ire at its executives, looking at their swanky jets and other unconscionable luxuries they allow themselves. Aren’t we conveniently forgetting the fact that all of us own a piece of the company? When the elected government of a democratic nation declares war on another country and kills a million people (speaking hypothetically, claro), should the culpa be confined to the presidents and generals, or should it percolate down to the masses that directly or indirectly delegated and entrusted their collective power?

More to the point, when a bank doles out huge bonuses, isn’t it a reflection of what all of us demand in return for our little investments? Viewed in this light, is it wrong that the taxpayers ultimately had to pick up the tab when everything went south? I rest my case.

Slippery Slopes

Mas, this dictum of denying bonus to the whole firm during bad times doesn’t work quite right either, for a variety of interesting reasons. Primeira, 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. Assim, 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. Verdadeiro, 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, Certifique-se, 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. Mais uma vez, 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? Se assim, can we expect China (or India, or Latin America) to bring about a much needed counterweight?


Profit Sharing

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. Bem, 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. Agora, suppose he argues, “Bem, 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 (desculpe, business units or asset classes, Quero dizer). 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.


Talent Retention

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. Então, out of the blue, an idiot cook of yours burns down the whole establishment. Você, claro, 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. Verdadeiro, 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.


Talent and Intelligence

In the last post, I argued that how hard we work has nothing much to do with how much reward we should reap. Afinal, there are taxi drivers who work longer and harder, and even more unfortunate souls in the slums of India and other poor countries.

Mas, I am threading on real thin ice when I compare, however obliquely, senior executives to cabbies and slum dogs. Eles são (the executives, que é) clearly a lot more talented, which brings me to the famous talent argument for bonuses. What is this talent thing? Is it intelligence and articulation? I once met a taxi driver in Bangalore who was fluent in more than a dozen languages as disparate as English and Arabic. I discovered his hidden talent by accident when he cracked up at something my father said to me — a private joke in our vernacular, which I have seldom found a non-native speaker attempt. I couldn’t help thinking then — given another place and another time, this cabbie would have been a professor in linguistics or something. Talent may be a necessary condition for success (and bonus), but it certainly is not a sufficient one. Even among slum dogs, we might find ample talent, if the Oscar-winning movie is anything to go by. Although, the protagonist in the movie does make his million dollar bonus, but it was only fiction.

In real life, no entanto, lucky accidents of circumstances play a more critical role than talent in putting us on the right side of the income divide. Para mim, it seems silly to claim a right to the rewards based on any perception of talent or intelligence. Heck, intelligence itself, however we define it, is nothing but a happy genetic accident.


Hard Work

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 para 14 hours a day, according the AIG executive under the spotlight here). Mas, do long hours and hard work automatically make usthose who deserve the best in life,” 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 workbut 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.


Planos de bónus de ratos e homens,,en,Nossos planos mais bem-sucedidos costumam dar errado,,en,Nós vemos isso o tempo todo em um nível pessoal,,en,acidentes,,en,bons e maus,,en,mortes,,en,tanto de entes queridos e tios ricos,,en,nascimentos,,en,e loterias todos conspiram para reformular nossas prioridades e tornar nossos planos nulos e sem efeito,,en,não há nada como uma infelicidade sólida para nos levar a colocar as coisas em perspectiva,,en,Esta oportunidade pode ser o proverbial forro de prata que somos constantemente aconselhados a ver,,en,O que é verdade em um nível pessoal também é verdade em uma escala maior,,en,O colapso financeiro de toda a indústria deu uma claridade filosófica à nossa profissão,,en,uma clareza de que poderíamos estar muito ocupados para notar,,en,mas para os terríveis problemas em que estamos agora,,en,Essa clareza filosófica inspira análises,,en,e colunas,,en

Our best-laid plans often go awry. 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. De fato, 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, claro) que às vezes são auto-serviço e às vezes busca da alma,,en,Agora nos preocupamos com a retidão moral por trás das expectativas insanas de bônus dos anos passados,,en,O caso em questão é Jake DeSantis,,en,o vice-presidente executivo da AIG, que renunciou publicamente ao New York Times,,en,e doou seu bônus relativamente modesto de um milhão de dólares para a caridade,,en,As razões por trás da renúncia são interessantes,,en,e forragens para esta série de posts,,en,Antes de ir mais longe,,en,deixe-me declará-lo imediatamente,,en,Eu vou tentar destruir seus argumentos o melhor que posso,,en,Tenho certeza que teria cantado uma música totalmente diferente se eles tivessem me dado um bônus de 1 milhão de dólares,,en,Ou se alguém teve a temeridade de sugerir que eu me separe do meu próprio bônus,,en,por mais insignificante que possa parecer em comparação,,en. We now worry about the moral rectitude behind the insane bonus expectations of yesteryears, por exemplo. 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. Vou manter essa possibilidade além do escopo desta coluna,,en,ignorando a inconsistência moral que outros possam perceber maliciosamente,,en,Eu vou falar apenas sobre os bônus de outras pessoas,,en,somos melhores em lidar com o dinheiro de outras pessoas,,en,E é sempre mais fácil arriscar e sacrificar algo que não nos pertence,,en,Esta é outra série de posts baseada em uma coluna minha na próxima edição da Revista Wilmott.,,en,Nesta série,,en,Examinarei os argumentos a favor e contra os enormes bônus e os paraquedas dourados,,en,O primeiro da série,,en,este post apenas define o cenário para a próxima meia dúzia,,en,O ponto de partida desta série é a carta de demissão pública de Jake DeSantis,,en,ex-EVP na AIG,,gd,e suas razões para acreditar na justiça dos enormes pacotes de bônus,,en, ignoring the moral inconsistency others might maliciously perceive therein. I will talk only about other people’s bonuses. Afinal, 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.


Castelo de cartas

Estamos em apuros,,en,Nenhuma dúvida sobre isso,,en,Nossos bancos e edifícios financeiros estão entrando em colapso,,en,Aqueles que estão de pé também parecem instáveis,,en,Indústria financeira como um todo está lutando para sobreviver,,en,como seus guerreiros de linha de frente,,en,vamos suportar o peso do banho de sangue com certeza a qualquer minuto agora,,en,Agourento como parece agora,,en,esta hora escura vai passar,,en,como todos os anteriores,,en,Como podemos evitar tais crises sombrias no futuro?,,en,Podemos começar examinando as causas básicas,,en,as razões estruturais e sistêmicas,,en,por trás da debacle atual,,en,O que eles são,,en,Na minha série de posts este mês,,en,Eu passei pelo que eu achava que eram as lições para aprender com a crise financeira,,en,Aqui está o que eu acho que vai acontecer,,en,A noção de gestão de risco certamente mudará nos próximos anos,,en — 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. E, 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. Os gerentes de risco terão que ser compensados ​​o suficiente para que os principais talentos nem sempre se afastem dele em papéis de risco.,,en,Paradigmas de risco de crédito serão revisados,,en,Os limites de crédito e as classificações são as ferramentas certas?,,en,Os instrumentos fora do balanço permanecerão fora do balanço,,en,Como vamos explicar a alavancagem,,en,Os quadros regulamentares vão mudar,,en,Eles vão se tornar mais intrusivos,,en,mas espero mais transparente e honesto também,,en,Esquemas de remuneração da alta gerência podem mudar,,en,mas provavelmente não muito,,en,Apesar do que os técnicos no fundo pensam,,en,aqueles que alcançam o topo são inteligentes,,en,Eles pensarão em algumas formas inovadoras de manter suas vantagens,,en,sempre haverá algo para esperar,,en,enquanto você sobe a escada corporativa,,en,Nietzsche pode estar certo,,en,o que não nos mata,,en,pode eventualmente nos tornar mais fortes,,en. 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. Não se preocupe; 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. Esperando que esta crise financeira sem precedentes não nos mate,,en,vamos tentar aprender o máximo possível,,en,The Razor's Edge por W Somerset Maugham,,en,Um pensamento sobre "House of Cards,,en, let’s try to learn as much from it as possible.


Hipocrisia Mercado Livre

Os mercados não estão livres, apesar do que os livros de texto nos dizer. em matemática, que verificar a validade de equações considerando assintótica ou limitar casos. Vamos tentar o mesmo truque na declaração sobre os mercados de ser livre.

Se os mercados de commodities estavam livres, não teríamos restrições tarifárias, subsídios agrícolas e outros mecanismos desviando mercado em jogo. Heck, cocaína e heroína seria livremente disponíveis. Afinal, há compradores e vendedores dispostos para as drogas. De fato, senhores da droga seria cidadãos respeitáveis ​​pertencentes em clubes de campo, em vez de cartéis-totting da arma.

Se os mercados de trabalho eram livres, ninguém iria precisar de um visto para ir e trabalhar em qualquer lugar no mundo. E, “salário igual para trabalho igual” seria um verdadeiro ideal em todo o globo, e ninguém iria reclamar sobre trabalhos que estão sendo exportados para países do terceiro mundo.

Mercados capitais, no fim de recepção de toda a agitação da tarde mercado, são altamente regulamentados com adequação de capital e outras exigências de Basileia II.

mercados de derivativos, nosso pescoço do bosque, são uma besta estranha. É passos dentro e fora do mercado de capitais como conveniente e atrapalha-se tudo para que eles precisam de nós quants para explicar isso a eles. Nós vamos voltar a ele em colunas futuras.

Então, o que exatamente é gratuita sobre a economia de mercado livre? É de graça — contanto que você lidar em mercadorias e produtos autorizados, operar dentro geografias prescritos, anular tanto capital como indicado, e não empregam aqueles que você não é suposto. Por tais redefinições criativas de termos como “livre,” podemos chamar mesmo um livre prisão de alta segurança!

Não me interpretem mal. Eu não seria a favor de fazer todos os mercados totalmente livre. Afinal, abrindo as comportas para o formidável talento indiano e chinês só pode afetar adversamente os meus níveis salariais. Também não estou sugerindo que nós desregular tudo e esperar o melhor. Longe disso. Tudo o que eu estou dizendo é que temos de ser honesto sobre o que queremos dizer com “livre” em mercados livres, e compreender e implementar o seu significado de forma transparente. Eu não sei se ele vai ajudar a evitar uma futura crise financeira, mas certamente não pode ferir.