And since we're talking about traders' salaries, I'll say that I also left out Taleb's discussion of the perverse effects of performance-based compensation of traders, both on the profitability (or, rather, lack thereof) of banks' proprietary trading desks [in plain English: a clear explanation of why hedge funds make money but banks trying to deploy the same strategies don't], and on encouraging traders to artificially increase the volatility of their portfolios. We have met the enemy, and he is us — Pogo
The stars create the mystique for the industry, and lots of money are poured in with no measurable result.
But a lot of money is poured, and remunerations follow that, and my point about regulators losing their good people to an industry that can afford to pay competent huge paychecks is a systemic issue. I expect that until you get regulators that get paid millions to do the job, you won't have good enough regulation. In the long run, we're all dead. John Maynard Keynes
I expect that until you get regulators that get paid millions to do the job, you won't have good enough regulation.
Then I will want to be a regulator ! the office would be a dream, paid millions just to slap the traders, duh ! Pierre
Regulators live in "learned ignorance" of the gamut of hedge fund (and CMOs, CLOs, mortgages etc. etc.) operations, because the banks and hedge funds have formed a powerful political lobbying force to keep the regulators out of even looking at them.
Deregulation good - thus keeping government out of our business good, including in areas where government intervention saved the day in the past because of systemic risk. In the long run, we're all dead. John Maynard Keynes
You can't expect a planetary economy that's being run like a giant video game for the benefit of a few thousand players to make any sense at all.
Slightly more technically, a core structural problem is that markets seem to believe that risk in the abstract creates value - if only because that's how salaries and bonusses are slanted.
So there has been constant pressure to increase and disguise risks, with the results we see today. People like Taleb are exceptionally insightful about the small details, but miss the bigger picture, which is that not all risky value is equal (windmills are more valuable than piratical asset stripping), and that some market feedback loops - like downward pressure on wages, which makes foreclosures more likely - have as much of an influence on risk as direct lending practices.
You can't solve these problems by tinkering with lending mechanisms. As long as markets believe that risk = value, there will always be pressure towards increasingly risky transactions and away from the creation of socially useful value.
This is a moral issue - a crisis of values - and has to be fixed at that level. The New Deal and the other examples of post-war consensus made a start in that direction, but were easy to subvert because they never stated the goal explicitly enough for it to sink into popular consciousness.
Jerome a Paris:A contingent commitment is still a commitment. How on earth did these disappear?According to US GAAP (Generally Accepted Accounting Principles), Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met: It is probable that assets have been impaired or a liability has been incurred. The amount of the loss can be reasonably estimated. If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range. SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher. Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonable possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.In other words, a mess.
A contingent commitment is still a commitment. How on earth did these disappear?
Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met: It is probable that assets have been impaired or a liability has been incurred. The amount of the loss can be reasonably estimated. If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range. SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher. Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonable possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.
Put it this way: Federal employees in America were promised a 20% pay increase to bring them up to level with private-sector workers back during the first Bush's presidency. To this day, Congress is still punting it, Friedman after Friedman, for fear of public outrage. I'd guess it'd be about $8-12k per employee per year if it was ever pushed through. And you think the voters are going to pay financial regulators millions?
Wall Street has a lot more money, anyway, so we're never going to be able to keep up with all of it. The best we can hope for is beefing up the regulators when crises like this hit. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
