Obama seems to be scaling back his rhetorical attacks on Wall Street compensation. Hopefully, he’s already tapped the extent of public anger… http://www.guardian.co.uk/business/2010/feb/10/obama-wall-street-bonuses
Is it just me, or does this just make complete sense? If you are running a highly leveraged firm, your ROE will be higher, and if you continue to take capital out of the company instead of reinvesting it into RE, then you continue to build assets while maintaining a marginal capital cushion. Couple that with commercial paper to pay day to day expenses instead of holding cash, and its just a recipe for disaster. When we look at businesses, a 4-1 leverage ratio is considered a bit high, adjusting for industry, and a 9-1 is pretty standard for banks, but 30-1, fluctuating to 50-1? And all the assets are held by similarly leveraged firms? Seems crazy to me. Reinvest the money to build the capital cushion.
Of course he is less angry… the government is banking on massive inflation to eventually reduce american debt… when the CEO of one of the largest banks in the world is now getting a $16mm bonus it makes you wonder where all the tax revenue is going to come from Whether you agree with the programs its going to or not, our mandatory spending is a choke on our budget
BizBanker Wrote: ------------------------------------------------------- > Well, yes and no. Obviously, reinvesting in the companies is good for their capital levels. It’s just that the graph of profit vs. talent for executives is really steep. For instance, if Jamie Dimon quits, there is a high probability that JPM’s profitability will decrease by more than what Jamie Dimon makes. So, it’s worth it to pay Jamie Dimon a lot of money to keep him from jumping ship. The same applies to mid level traders and bankers. A good trader can easily produce $1mm more than a slightly worse trader. So, it becomes necessary to pay them enough so they don’t leave. This is different from say, an auto construction worker. Even an extremely talented GM plant worker is not going to be 2x as productive as a less talented person. They are easily replaceable, and are thus not paid as much as the bankers. Bank CEOs aren’t even paid that much compared to other CEOs. Steve Jobs makes more money than any bank CEO. In 2007, that Motorola guy was paid around $200mm even though Motorola was run like crap.
^^ Agreed on the MPL point. But this only looks at revenue and doesnt adjust for risk, which is difficult in a bank balance sheet much less a financial services company. Ex. an I Banker packages 500MM worth of ABS and makes the bank a heft 5MM fee once all is offloaded. So the revenue is 5MM. But if there is an off balance sheet liability for guaranteeing the debt, next period the bank may be on the hook for a 5MM shortfall in payments. In commercial banking, if you have a bad year, the owner/owners of the business doesnt take a hefty bonus until the capital levels have been restored, not to mention the credit commitments that may be retracted.
More revenue does not necessarily mean more risk. Good traders can spot opportunities to unload risk for good prices, thus, making more money but not increasing risk relative to what they would have through a series of more poorly picked trades. Even if you make aggressive bets on one kind of exposure (maybe delta), you might not have more risk overall if you are good at hedging other sorts of risk (gamma, theta, vega, etc.). Talent makes a huge difference here.
^^ Yes, but that is my point. I dont fall in the camp that all bonuses are bad, I do fall into the camp that you need to justify and examine the risk intertemporally. As we all know, shifting costs and liabilities is the name of the game for some of these firms, but recognizing profit and equity is relative to the biggest payout periods. Looking at one incentive number is misleading, and I think this is done alot at this level. I am for a more holistic view of bonuses. Main Street has a right to be p***ed because these business owners know if they have a bad year, they are screwed for at least a year until the “right the ship” and rebuild their business because their assets are at risk. These guys, Cayne, O’Neal, Thain just walk away.
Those CEOs didn’t walk away unscathed - they all got fired. It’s to their credit that they were talented and hardworking enough to amass large personal fortunes and negotiate favorable termination terms. Small business guy shouldn’t whine just because someone else is far better at life than him.
Stepping away from the financial side and looking at the political strategy aspect, a politician (especially obama) has to be careful about playing too much on populist theme now because they could be shunned by “corporate donors” during the next round of elections. The recent SC ruling giving corporations and union the ability to contribute unlimited funds to campaigns is going to be an absurd charade of democracy.
Far better at life or right place right time? And if being “scathed” is getting a multimillion golden parachute, I will do that job in a second. I believe some have worked through the ranks, but I do also believe a great deal of those jobs are right place right time. Like being able to work unpaid internships because daddy is paying your summer bills, or even Bill Gates. He never would have gone into contract with IBM if his mother didnt know the Pres/CEO ( I cant remember which, it was in his biography.)
^^ Agreed about the donations, thats why I believe he will be a one termer, maybe by his choice even.
Of course part of it is luck, but do you really think Bill Gates is not 10x smarter, more driven and more talented than the average mom and pop store owner? Come on. In a different life, he might not have been the richest guy in the world, but he would have still been well off.
Hello Mister Walrus Wrote: ------------------------------------------------------- > Of course part of it is luck, but do you really > think Bill Gates is not 10x smarter, more driven > and more talented than the average mom and pop > store owner? Absolutely. Extremely successful CEOs and entrepreneurs would rise to the top of whatever organization they happened to be in. Phil Knight wasn’t awesome at making shoes, he was awesome at business. The same can be said for any truly great business leader. It’s exactly their drive, talent, and vision that separate them from your average corporate joe.
^^ I wonder if people thought the same about Madoff and Allen Stanford.
Uh, you can’t just pick a couple of people who committed fraud and say they are representative of all successful people…
Those CEOs didn’t walk away unscathed - they all got fired. It’s to their credit that they were talented and hardworking enough to amass large personal fortunes and negotiate favorable termination terms. Small business guy shouldn’t whine just because someone else is far better at life than him Well according to this statement, they were “far better at life” than the average small business person, which I wholeheatedly disagree. I dont measure ones life by his wealth.