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End Bonuses For Bankers

samzenpus posted more than 2 years ago | from the end-of-the-gravy dept.

Math 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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Except that.... (5, Insightful)

MrNthDegree (2429298) | more than 2 years ago | (#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.... (4, Insightful)

ObsessiveMathsFreak (773371) | more than 2 years ago | (#38003252)

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

Re:Except that.... (3, Informative)

V-similitude (2186590) | more than 2 years ago | (#38003444)

Re:Except that.... (-1, Troll)

Anonymous Coward | more than 2 years ago | (#38003648)

Thank you. Of course all the inflammatory, nonsensical "bankerz are teh evilz" posts will go +5 informative while you'll sit at 1, but this is really the only reasonable post this discussion will see. Claiming bonuses are "an incentive for success without a corresponding disincentive for failure" is nonsense, traders (not bankers, who generally don't get bonuses) disincentive is not getting a bonus. These are people who only care about money, that's why they do what they do (and believe me, it's horrible job with brutal hours and inconceivable stress). You can't take money away from them, so the only possible disincentive is to not give them more money, which is why the bonus system exists in the first place. Without bonuses, traders would take even more risks, since currently overexposing themselves puts them at risk of a dropping their entire bonus if a market correction happens near the end of a bonus period. If they were straight salary, they'd have no fear of overextension since they'll still get their salary and can weather the correction. Yes, there's always the possibility of collapse, but traders don't prepare for collapse since there really is no way as an individual trader to protect yourself against a collapse in your sector. Eg, if you traded Mortgage Backed Securities in 2007, no matter what you did you were fucked, so it really didn't matter.

True to every corporation (2, Insightful)

Hentes (2461350) | more than 2 years ago | (#38003148)

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

Re:True to every corporation (5, Insightful)

xMrFishx (1956084) | more than 2 years ago | (#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.

Re:True to every corporation (5, Insightful)

aintnostranger (1811098) | more than 2 years ago | (#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.

Re:True to every corporation (1)

cayenne8 (626475) | more than 2 years ago | (#38003594)

You know...I'll be concerned about private banks' bonuses...as 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....

Re:True to every corporation (1)

xMrFishx (1956084) | more than 2 years ago | (#38003602)

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.

Re:True to every corporation (-1)

Anonymous Coward | more than 2 years ago | (#38003558)

Solution: no more taxpayers.

That will never happen though. God forbid you fuckers actually survive on your own and stop feeling self-entitled.

Re:True to every corporation (3, Interesting)

Attila Dimedici (1036002) | more than 2 years ago | (#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.

Re:True to every corporation (5, Interesting)

An Onerous Coward (222037) | more than 2 years ago | (#38003750)

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?"

s/capitalism/cronyism (5, Insightful)

Anonymous Coward | more than 2 years ago | (#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?

Re:s/capitalism/cronyism (1)

GodInHell (258915) | more than 2 years ago | (#38003682)

Stupid. Che was and evil homophobic war criminal.

Doesn't really matter who sold it.

Re:True to every corporation (5, Insightful)

operagost (62405) | more than 2 years ago | (#38003612)

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.

Re:True to every corporation (1)

Hentes (2461350) | more than 2 years ago | (#38003714)

That is called technocracy not capitalism.

Re:True to every corporation (4, Insightful)

dslbrian (318993) | more than 2 years ago | (#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.

Re:True to every corporation (0)

Anonymous Coward | more than 2 years ago | (#38003212)

This is a fundamental property of capitalism: when a corporation gets lucky it can cash in and when it gets unlucky just go and get a handout from the government.

FTFY

Re:True to every corporation (1, Offtopic)

Marxist Hacker 42 (638312) | more than 2 years ago | (#38003264)

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.

Re:True to every corporation (4, Interesting)

aix tom (902140) | more than 2 years ago | (#38003498)

That's true. The system we have *now* in most of the world is basically "stone cold capitalism for the people" and "cosy socialism for the corporations"

Re:True to every corporation (0)

Anonymous Coward | more than 2 years ago | (#38003398)

Wrong. Bankruptcy and limited liability corporations are two reasonable add-ons to capitalism. But that's not what Taleb is calling out.

Re:True to every corporation (3, Insightful)

wintercolby (1117427) | more than 2 years ago | (#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.

He got away with that??? (1)

davidwr (791652) | more than 2 years ago | (#38003664)

I was under the impression that screwing the IRS was one of the few things that even corporate bankruptcy wouldn't cover, especially if civil or criminal fraud was involved.

Re:He got away with that??? (1)

wintercolby (1117427) | more than 2 years ago | (#38003718)

After the corporation is already dissolved, the IRS will trackdown the LLC partners and make them pay the back SS and medicare payments?

Re:True to every corporation (5, Interesting)

Anonymous Coward | more than 2 years ago | (#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.

Just eliminate bonus for everyone (0)

Anonymous Coward | more than 2 years ago | (#38003150)

Bonus in government is even worse.

It's not a complete solution yet... (4, Insightful)

javakah (932230) | more than 2 years ago | (#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.

Re:It's not a complete solution yet... (1)

i.r.id10t (595143) | more than 2 years ago | (#38003266)

Actually... since banks are publicly owned/traded corporations, wouldn't one just need to get enough voting rights on blocks of stock (either thru purchase or delegation) and have a share holders vote on it?

Re:It's not a complete solution yet... (5, Insightful)

Lemmy Caution (8378) | more than 2 years ago | (#38003328)

When you see who holds and manages those shares and who has voting rights, you'll understand just what a predicament we're in. You're asking the people who are sitting on the money to stop writing themselves checks. They won't.

Re:It's not a complete solution yet... (1)

Anonymous Coward | more than 2 years ago | (#38003786)

and those on the board setting the ceos paycheck and bonus, is the ceos of other companies whe other ceos are on the board setting their paycheck and bonus, once you go around the full circle it all makes sense ....

This is one of those (4, Insightful)

Compaqt (1758360) | more than 2 years ago | (#38003170)

"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.

Re:This is one of those (1)

Marxist Hacker 42 (638312) | more than 2 years ago | (#38003298)

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

Re:This is one of those (1)

gbjbaanb (229885) | more than 2 years ago | (#38003494)

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 employees to spend on flash cars and property.

Re:This is one of those (1)

publiclurker (952615) | more than 2 years ago | (#38003806)

Well, in theory the interest is supposed to cover the inevitable failures to repay, and the banks are supposed to do a good job ov checking things out in order to ensure that the person taking out the loan was likely to be able to actually pay it back. the problem is that the banks were reselling these loans with worthless assertions of quality. The bank got the money from the closing costs and didn't have to deal with the fact that the loans were worthless. Given the circumstances, they had no reason to actually verify anything.

Re:This is one of those (1)

Anonymous Coward | more than 2 years ago | (#38003364)

Banking evaluates entities that want loans and takes deposits, which are the source of their income, and loans the deposits to the people that want the money. For that service, the people who deposit take a cut and the bankers pocket the rest. They produce a service.

You increase productivity when bankers make smart loans to the right folks who will pay them back. Performance incentives are actually useful to bankers so they would make the right loans. What people don't do is penalize bankers for not being conservative with pay cuts.

Finding the right folks to loan money to is risky stuff. If you eliminated inflation, savings for the average common folk would be enough to possibly tide them over in retirement, but since that is not the case, investments need to be made before the day one stops working comes about so there is additional resources to rely on once the income stops. If there are no banks, one would need to find investments themselves to invest in, which is not a risk most folks are prepared to take on themselves.

If there are additional industries that are budding, there will be more businesses. Most of these businesses will need loans at one point. More man power would be needed to evaluate the soundness of new businesses. Banking industry growth is dependent on other sectors growing, but as other industry grows, so does it. And as banks grow, the industries that depend on banking to succeed, such as mainframe computing, would also grow.

It makes perfect sense to give bonuses to bankers. It doesn't make any sense not to take money away from their pay check if they screw up.

Re:This is one of those (0)

Anonymous Coward | more than 2 years ago | (#38003544)

The banking industry provides credit to those who wish to borrow money. If this is so unimportant, then why is everyone complaining "the banks aren't lending!" and "I can't get a loan!" and "I can't refinance my mortgage!" and "I can't expand my business!" ???

Banking is supposed to be a support process, not a growth industry itself? How do you tell that to the shareholders? You know, the people who have put their capital at risk? Would you give money to a bank (either as debt or buy equity) and expect 0% growth? Would you be happy?

Clawback, not end (4, Interesting)

DeadCatX2 (950953) | more than 2 years ago | (#38003172)

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 (3, Interesting)

ObsessiveMathsFreak (773371) | more than 2 years ago | (#38003310)

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.

Re:Clawback, not end (1)

Anonymous Coward | more than 2 years ago | (#38003450)

Instead of taking away wealth creation from the companies that succeed, why not punish those who fail by not bailing them out? Your business fails you go out of business, pretty simple process actually.

Too big to fail is a big fat lie.

Re:Clawback, not end (4, Insightful)

compro01 (777531) | more than 2 years ago | (#38003674)

Instead of taking away wealth creation from the companies that succeed, why not punish those who fail by not bailing them out? Your business fails you go out of business, pretty simple process actually.

Too big to fail is a big fat lie.

The issue is that you're "punishing" the fictional person, rather than the actual person making the decisions, and thus the entire "simple process" fails completely in achieving its goal.

Re:Clawback, not end (4, Insightful)

Lemmy Caution (8378) | more than 2 years ago | (#38003368)

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.

Re:Clawback, not end (0)

Anonymous Coward | more than 2 years ago | (#38003788)

Actually, yes. Some do. Hospitals are starting to experiment with giving more pay to Doctors who do a good job / keep patients happier / see more patients than underperforming doctors.

The beancounters at the hospital I used to work at suggested it and the docs laughed it off the table.

Re:Clawback, not end (4, Interesting)

Catiline (186878) | more than 2 years ago | (#38003378)

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.

Re:Clawback, not end (2)

UnknowingFool (672806) | more than 2 years ago | (#38003400)

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 realize the implications or that Goldman had started to short those investments.

Re:Clawback, not end (1)

suutar (1860506) | more than 2 years ago | (#38003406)

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.

Corporations are people. Death penalty to corps? (5, Insightful)

140Mandak262Jamuna (970587) | more than 2 years ago | (#38003190)

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.

Re:Corporations are people. Death penalty to corps (3, Interesting)

140Mandak262Jamuna (970587) | more than 2 years ago | (#38003276)

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.

Re:Corporations are people. Death penalty to corps (1)

TFAFalcon (1839122) | more than 2 years ago | (#38003324)

Why give the assets to the stock holders? Confiscate them as a fine.

Re:Corporations are people. Death penalty to corps (3, Insightful)

140Mandak262Jamuna (970587) | more than 2 years ago | (#38003432)

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.

Re:Corporations are people. Death penalty to corps (1)

Surt (22457) | more than 2 years ago | (#38003338)

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

Re:Corporations are people. Death penalty to corps (0)

Marxist Hacker 42 (638312) | more than 2 years ago | (#38003346)

I'd go one step further. NO bank should be able to operate across state boundaries, without using a federal clearing house. Including the FED. Let's expand the FED to 50 state-run corporations. That way, no one can take down the whole country.

Re:Corporations are people. Death penalty to corps (2, Insightful)

Anonymous Coward | more than 2 years ago | (#38003448)

I vote we start chasing them into the sewer pipes and just save ourselves some time.

Re:Corporations are people. Death penalty to corps (3, Insightful)

religious freak (1005821) | more than 2 years ago | (#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?

Re:Corporations are people. Death penalty to corps (4, Interesting)

140Mandak262Jamuna (970587) | more than 2 years ago | (#38003760)

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.

Re:Corporations are people. Death penalty to corps (1)

milbournosphere (1273186) | more than 2 years ago | (#38003496)

"I'll believe corporations are people when Texas executes one."

Another Suggestion (0)

ISoldat53 (977164) | more than 2 years ago | (#38003218)

Make it illegal to be an officer of a bank that goes broke. There's no reason for a bank to go out of business if the officer's have done their job right.

no shit (2)

Khashishi (775369) | more than 2 years ago | (#38003226)

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.

Re:no shit (1)

hedwards (940851) | more than 2 years ago | (#38003414)

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.

When will we learn? (1)

perlchild (582235) | more than 2 years ago | (#38003228)

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 need to balance our action, both to help take risks, but not needlessly, nor without a plan.

This also applies to state investment, state funding, and state regulation of private investment, and state direction of private investment.

If you spend a dollar, you gotta be responsible for it.
If you spend a million, and it goes bad, do you go to jail for it?

If not...
the big question is why?

Wrong Headed (2, Insightful)

Anonymous Coward | more than 2 years ago | (#38003272)

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.

Again ***
      The solution is to not bail them out when they fail.
                Therefore, they should not be allowed to be so big that they pose a systemic risk to the entire system.

Period.

Re:Wrong Headed (1)

Anonymous Coward | more than 2 years ago | (#38003466)

The Justice Department didn't spend 10 years trying to break apart Microsoft. They successfully tried them and found them to be a monopoly in a reasonable amount of time. However, when it came to deciding what to do about them, the administrations changed and the new one said they had no interest in doing anything about it.

Incentive switch (2)

ackthpt (218170) | more than 2 years ago | (#38003282)

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.

Re:Incentive switch (0)

Anonymous Coward | more than 2 years ago | (#38003392)

Where do you work that not making money for the corporation is OK? People are fired all the time for not being productive (not making enough money) now. You think Wall Street bankers not making profit keep their jobs? No, they get fired now. All this guy is saying is take away the non risk of risky investing by eliminating bonuses. Basically, make money by keeping the customer rather than trying to hit the lottery.

Your percentage idea is good, too, though. There was a specific limit till Glass-Steagal was repealed.

Re:Incentive switch (2)

suutar (1860506) | more than 2 years ago | (#38003486)

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.

News for haters? (1)

Kohath (38547) | more than 2 years ago | (#38003290)

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.

Re:News for haters? (0)

Anonymous Coward | more than 2 years ago | (#38003418)

BTW you don't have to add BTW.

Re:News for haters? (0)

Anonymous Coward | more than 2 years ago | (#38003616)

People who hate bankers? You mean pretty much everyone except bankers.

This violates the fundamental rules of capitalism (1)

Anonymous Coward | more than 2 years ago | (#38003296)

This violates the fundamental rules of capitalism. If banks want to give bonuses, then let them. Just don't subsidise them, when they are about to go bankrupt. This would be truly capitalism. Not imposing some abstract rules about how one should do his business. If bank is shitty and risky, then choose a different bank, let this one go bankrupt. Simple.

Risks are good (0)

Anonymous Coward | more than 2 years ago | (#38003300)

The whole economy is based on people with money giving it to other people, and getting something else back (sometimes more money).
Eliminating risk taking just means that the minimum wage guy looking for a home load won't get it.

reinstate Glass-Steagall instead (2, Insightful)

Anonymous Coward | more than 2 years ago | (#38003306)

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.

Re:reinstate Glass-Steagall instead (2)

grimmjeeper (2301232) | more than 2 years ago | (#38003420)

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 to do.

Rules of Capitalism (0)

Anonymous Coward | more than 2 years ago | (#38003326)

'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...

The fundamental rules of make-believe capitalism. The perfect competition, perfect information world the far-right will have you believe exist. Real capitalism is what really happened. And the free market is the nirvana that currently exists in Somalia.

Bad idea, there is disincentive for failure (2)

SuperKendall (25149) | more than 2 years ago | (#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.

Novel concept, that (4, Insightful)

overshoot (39700) | more than 2 years ago | (#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.

Re:Novel concept, that (1)

rkhalloran (136467) | more than 2 years ago | (#38003668)

>> This changed when firms went public and came to be run by employees rather than partners

Not "by employees", but by the other investment groups (401k's, pension funds, etc), who want their guaranteed quarterly dividends or-else-they'll-throw-the-bums-out, leading to riskier investments in order to placate them. Combine that with situations like the CRA, where the banks are told on the one hand to lend prudently, but on the other told they'll be penalized if they fail to lend enough in depressed areas, by definition a riskier prospect.

End Bonuses for Bankers (0)

Anonymous Coward | more than 2 years ago | (#38003374)

Bonuses are ok.

What's really needed is a strict control over lending. The regulators should define all the requirements for a valid loan, such as who, for what purpose, required collateral, amount in relation to income etc. Failure to follow the standard loan requirements would mean that the bank would face a heavy fine or else lose Federal Deposit Insurance.

This requirement would be backed by frequent surprise audits of the loan portfolio

don't bother (0)

Anonymous Coward | more than 2 years ago | (#38003424)

It won't work. Any time someone tries to pass a law making someones compensation performance-based, some union fires up the class-warfare propoganda machine and gets it voted down. I don't know if bankers have a union yet, but you can bet they will.

Nassim is one of the brightest thinkers around (4, Interesting)

MetricT (128876) | more than 2 years ago | (#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.

Reform them, don't elminate (2)

gurps_npc (621217) | more than 2 years ago | (#38003442)

As per a bolg post I made back in October (What the Wall Street Protestors Should Demand [blogspot.com] , 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.

Re:Reform them, don't elminate (1)

DesScorp (410532) | more than 2 years ago | (#38003706)

I agree with that, especially in regards to things like real estate bundles. The idea of banning bonuses is nothing more than thinly disguised attempts to enact salary caps.

The real problem isn't that bankers are making bonuses, though. The problem is that when they fail, there's no consequences, because guys like Ben Bernanke will always support bailing them out "for the greater good". As long as they know this, they'll do stupid things at times. It's not capitalism if you can't fail. As Rob Long said on an excellent Ricochet podcast, "When these guys crash the markets, I want to see them selling apples on the street, not being bailed out by George Bush and Chuck Schumer".

Take away consequences (like, losing everything) and they'll be stupid. Why not? You're paying for it.

Risk is in the eye of the behold (3, Insightful)

davidwr (791652) | more than 2 years ago | (#38003458)

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.

This is just silly (2)

rsilvergun (571051) | more than 2 years ago | (#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.

Thats Just Silly! (1)

uslurper (459546) | more than 2 years ago | (#38003462)

The bonuses are not what is the problem, it is the bone-headed and short-sighted triggering requirements that cause the problem.

1 million dollar bonus = Increase profit by 10% in a fiscal year = layoffs = outsourcing = switching to inferior products = false advertising = product recalls next year = class action lawsuits = declining branding = 10 years slump in sales = bankrupcy = executive doesnt care cause he was already hired by another company and is now going to buy the first company's assets for a discounted rate

Lets have better requirements like "Increase the locally employed" or "increase transparency to investors" or "negotiate a better health plan" or "be honest for a year" or "dont suck" ...

From Gaming Theory (0)

drolli (522659) | more than 2 years ago | (#38003492)

I would say: make boni AND mali if you like. Just making only Boni for an action will always imbalance the game.

Bonuses not the problem (0)

Anonymous Coward | more than 2 years ago | (#38003520)

I'd say the problem is not when bailouts and bonuses mix, it's when bailouts happen period.

A what? (1)

slapout (93640) | more than 2 years ago | (#38003542)

"risk engineering prof"?

Or provide both bonus and penilty (1)

Busted1942 (1533889) | more than 2 years ago | (#38003554)

If you provide the other end of the scale and establish a financial and career penalty system for failure up to dismissal, it should make them more aware of risk.

you fools simply do not understand capitalism (-1, Flamebait)

jollyreaper (513215) | more than 2 years ago | (#38003592)

Look, you have to pay top dollar for top talent. It's just that simple. People who are good at what they do don't work for free; they don't even work for cheap. Top performers would rather starve to death than be insulted with remuneration that's a penny less than what they deserve. You want the best, you better pay for it.

Conversely, everyone else loves working for bottom dollar because they're grateful to have a fucking job. I put an add in the paper and there's a hundred people lined up out the door tomorrow hungry and ready to work. Learn to make due with less. Austerity is the new prosperity. Survival is the new American Dream. You want to be paid more? Start your own goddamn company, you cocksucking hippie!

Never going to happen (2)

sl4shd0rk (755837) | more than 2 years ago | (#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.

Change it (1)

inexia (977449) | more than 2 years ago | (#38003634)

First solution would be to change the laws and force the banks to be just banks and not a forum for creating markets on the backs of the innocent. Allowing them to have investment capabilities under the same roof was the biggest mistake ever allowed. I still can't wrap my head around companies that are either under government control or still owe the government money for the bailouts are still delving bonuses. Talk about an egregious slap in the face.

I have no problem with bonuses (1)

davidwr (791652) | more than 2 years ago | (#38003638)

As long as the bonus isn't paid out until the transaction is completed.

In the case of loans or loan derivatives, it means until the underlying loans are discharged.

If as a banker you book $10M in mortgages in a given year and your bank then sells them to investors.

Fine, your bonus is held in escrow based on how much of the $10M in loans have been paid off. This means you'll be collecting small bonus checks for the next 30 years. It also means if a loan goes south and the investors lose money, not only do you lose the part of your bonus related to the unpaid balance of the loan, it goes to the investors. Money-wise it will help investors only pennies on the dollar, but symbolically it's significant.

science.slashdot.org? Really? (1)

DNS-and-BIND (461968) | more than 2 years ago | (#38003642)

What the hell is this doing in "science.slashdot.org"? In what way is this science?

I also notice this has the "PI" symbol for mathematics. What the fuck? This is neither math nor science, it's politics plain and simple. The yellow journalism of using the epithet 'banksters' is disgraceful. Hey, think what you want, that's OK. But don't call it science nor mathematics.

Good idea (1)

Bardwick (696376) | more than 2 years ago | (#38003646)

Let government decide non-government employee pay.. What could possibly go wrong?

Yet... if they don't take risks (1)

DerekLyons (302214) | more than 2 years ago | (#38003650)

Yet, if they don't take risks, then their stockholders bitch about reduced profits, and their depositors bitch about reduced returns/interest on their deposits - and the money and investors move to banks that will take the risk.

Goodbye banks (1)

randomErr (172078) | more than 2 years ago | (#38003662)

Why would any bank stay in the country if we take the right to give bonuses? Also weren't most of those 'risks' that banks took mandated by the laws at the time?

Re:Goodbye banks (1)

Dutchmaan (442553) | more than 2 years ago | (#38003768)

Because there's still money to be made, where there's a market, there's a bank. The bonus situation is way out of hand. A CEO can run a company into the ground and put thousands out on the street and still be able to fly to another country for dinner without so much as a bead of sweat on his brow. Management needs to have THEIR fate tied to the company they're running.

Risk is good (1)

Moe Taxes (304424) | more than 2 years ago | (#38003688)

The problem is not the bonus it's that there is no actual risk, the banks lost it all and then they were bailed out.

Private profit and socialized losses is wrong, but the fix is not to eliminate the private profit, The risk needs to be real, big banks should fail when they are wrong.

For every proposed solution or reform... (4, Funny)

dpilot (134227) | more than 2 years ago | (#38003708)

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.

I have a better and simpler solution... (1)

vagabond_gr (762469) | more than 2 years ago | (#38003726)

Eliminate bankers!

But Bankers make far more now than under Bush (1)

howardd21 (1001567) | more than 2 years ago | (#38003770)

Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21 / 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show. Source: http://www.washingtonpost.com/business/economy/wall-streets-resurgent-prosperity-frustrates-its-claims-and-obamas/2011/10/25/gIQAKPIosM_story.html [washingtonpost.com]
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