Monthly Archives: November 2011

End Deposit Insurance, Not Bonuses – By Reihan Salam – The Agenda – National Review Online

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[Another commentary and rebuttal to NNT’s recent NYT ‘End Bonuses for Bankers’ piece. Again, it would be nice if these articles were based on the larger context of NNT’s entire Bailout commentary rather than a single opinion piece. JH]

End deposit insurance: a simple heuristic for a complex problem. Taleb of all people should appreciate that we need firms to have the freedom to pursue a variety of different organizational strategies to survive and flourish. If the problem is excessive risk-taking, and I think it may well be, deposit insurance pours fuel on the fire. Eliminate it for large financial institutions and the competition won’t be over which can make the biggest bets, but rather which can attract the most depositors by being as stodgy and risk-averse as possible. The bonus “problem” will solve itself.

Link to full story: End Deposit Insurance, Not Bonuses – By Reihan Salam – The Agenda – National Review Online.
HatTip to Dave Lull.

No, Wall Street Bonuses Aren’t Destroying the Economy – Daniel Indiviglio – Business – The Atlantic

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Going Back to the Partnership StructureTaleb suggests that investment banks go back to what they used to look like a few decades ago — where they were partnerships instead of publicly traded companies. This idea does have some attractive features, as the employees all share in the losses. But that also makes it somewhat unattractive for certain employees: if one trading group has a miserable year, then everybody suffers.Here’s the problem: investors love financial firms. Taleb oddly points to the recent failure of MF Global as an example of the dangers of excessive risk-taking. But that situation actually demonstrates exactly what should happen. A financial firm took big risks that went bad, and it failed. Its investors lost money. No investor was coerced to put money into MF Global. If they didn’t like risk taking, then they could have invested in a utility, a Dow component, or a U.S. Treasury. They knew what they were getting into and wanted a chance to reap the significant return that a company like MF Global offered.

[The article suggest to me that the author isn’t familiar with NNT’s various commentary on the banking situation. Certainly NNT doesn’t suggest that curbing bonuses alone will fix anything, and he has been one of the loudest proponents of getting rid of banks that are ‘too big to fail’ since the crash began. See: Ten principles for a Black Swan-proof world Published: April 7 2009 20:02 JohnH.]

Full Article: No, Wall Street Bonuses Aren’t Destroying the Economy – Daniel Indiviglio – Business – The Atlantic.
Hat Tip to Dave Lull.

End Bonuses for Bankers – NYTimes.com

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Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called “black swan” events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters.

Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.

The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi’s code specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”

Full Article: End Bonuses for Bankers – NYTimes.com.
HatTip to Dave Lull.