Banker Pay and the Crisis
The idea of reforming compensation practices at financial firms is even more in the air in Germany than in the United States, and this is apparently something Angela Merkel has been talking up in advance of the election. I wouldn’t really mind if we did this, but I’m pretty skeptical. For one thing, the empirical evidence that this is really the issue is quite weak. For another thing, clearly the reason bankers pay themselves so much money is that banking firms make so much money. They’re not going to just pile the money up on the roof and light it on fire. Huge finance profits imply huge finance compensation packages. Adopting new rules around compensation seems likely to create a few hours of extra work as people try to figure out how to get around the rules.
Conversely, if we adopted a new regulatory scheme that was effective at controlling bad behavior, that would probably reduce financial sector profits and lead to more reasonable salaries.
All that said, what I think people really need to do is confront the fact that obscene banker compensation is really a social justice issue rather than a financial regulation issue. Which is to say the sky-high pay seems wrong just as such rather than because there’s a specific bad incentives issue that needs to be corrected. And the solution to this is just taxes. When I met yesterday with some smug, arrogant, unapologetic Germany bankers I found it much less infuriating that meeting with smug, arrogant, unapologetic American bankers because I know the Germans are paying higher taxes and those taxes are going to finance a much more generous welfare state (bailouts for normal people, if you will) than we enjoy in the United States.
57 Responses to “Banker Pay and the Crisis”
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September 23rd, 2009 at 9:37 am
You are right the high compensation is really just an income-splitting deal worked out between bank owners and bank managers . . . so why is it even “wrong”? To be sure, bank owners may have worked out a bad deal for themselves if they aren’t getting better performance out of paying their managers more, but protecting capitalists from overpaying their managers is not high on my list of moral issues.
Of course that doesn’t mean higher taxes is a bad thing. But I think it is counterproductive to that end to describe this as a punishment for bad behavior, as opposed to simply the fairest way to pay for the government’s justified role in civil society. And in part that is because I don’t think we can or should just target high-paid bank managers with higher tax rates, but rather anyone with a similar salary.
September 23rd, 2009 at 9:41 am
I’m not sure you’re appreciating how messed up the incentives can be if doing well one year gets you a seven or eight figure bonus, but performing poorly enough to get sink the company will only get you fired (maybe). The behavior that made you rich in 2005 put you out of business in 2007 and 2008, yet in both years the behavior, betting the farm on MBS, was not good. Clawbacks are needed in order to try and change this behavior.
September 23rd, 2009 at 9:47 am
There needs to be a clear understanding that banking is a government function that is franchised-out to private firms. That money that is lent is ultimately PUBLIC money.
If a hedge fund manager can make billions from risking his clients own money – fine and dandy. But what they actually do is combine a small amount of capital with 50 to 100 times that amount of money borrowed from the public.
If the financiers use public money, their profit should be strictly limited. That was a major rationale for Glass-Steagal. Otherwise, financiers are parasites sucking the wealth from the public’s body.
September 23rd, 2009 at 9:48 am
Shocking, Matt is skeptical about doing something that may actually damage the power of bankers. Pretending not to hate the poor while constantly advocating that every penny be taken out of their hids while demanding that bankers never be held accountable is pretty much Matt’s shtick.
Because pursuit of this level of truly massive short term pay had absolutely nothing to do with their willingness to ignore the long-term solvency of their companies and only focus on short-term profits. I mean, I can’t see at all how the two could possible be related. How on earth could forcing people to spend several years in order to make 40 million dollars possible inventivize them to take a longer term approach to the financial stability of the country and their firms? It’s not like money has a limited supply or anything, so there’s no way these corrupt pieces of shit gobbling up an every bigger piece of the pie could actually be keeping other peoples wages down. The fact that executive pay has gone up the entire time that worker pay stagnated and fell is purely a coincidence. Nothing to see here folks. Move along! MOVE ALONG!!
Where is Petey to call this guy a trustfund scumbag when it actually makes sense?
September 23rd, 2009 at 9:50 am
Aren’t most of the rules in place of the sort that don’t really punish the top executives? I don’t know if any specific ones have been proposed, but most of them seem to be along the lines of delaying payment for a short period of time in case the firm implodes. If everything goes well, the big guys still get the big checks.
September 23rd, 2009 at 9:51 am
daveNYC,
The problem is that if the bank’s owners actually want their managers to take those risks, then they will find managers willing to do so, regardless of the compensation scheme.
So I think Matt is basically right: you have to change the incentives for the owners first and foremost.
September 23rd, 2009 at 9:54 am
I’ve seen these:
Lower permittable leverage rates.
Smaller financial firms
Link bonuses to actual profits at the end of the contracts.
September 23rd, 2009 at 9:55 am
How can we get the financial sector to stop soaking up the minds, bodies and money of the economy? Can regulation of banking compensation be a meaningful part of it?
September 23rd, 2009 at 9:56 am
The reason banks make so much is because of leverage; they are investing money they do not have in the first place. This is exactly what got us into this problem into the first place.
This is the problem that needs to be solved; massive leveraging must be outlawed. As as side effect this will solve the pay problem (which is a symptom and not a cause).
September 23rd, 2009 at 9:57 am
banking firms make so much money. They’re not going to just pile the money up on the roof and light it on fire.
They might use it to pay down debt or pay dividends to shareholders
September 23rd, 2009 at 9:58 am
All that said, what I think people really need to do is confront the fact that obscene banker compensation is really a social justice issue rather than a financial regulation issue.
Great. After all the work done by Clinton, Yglesias wants to bring back the spite left.
September 23rd, 2009 at 9:58 am
When you consider that almost every bank ever created in history has gone under, that maybe 1000 more American banks will, and that several giants are functionally bankrupt but kept alive through accounting legerdemain I think the proposition that banks make a lot of money is false.
Banks fail, bankers get rich.
September 23rd, 2009 at 9:59 am
Brian J, If that’s true, then these people are being paid more than they need to be paid. What are the odds that a bank is paying these people massive amounts of money despite the fact that they don’t actually have to pay these people massive amounts of money? They clearly aren’t doing it for their actual abilities, or these problems wouldn’t happen.
If they could get these people to do these things for less money, they would be doing so. Since you don’t appear to have any real alternative course of action, your only purpose seems to be to say “But we can’t do that!”.
September 23rd, 2009 at 10:02 am
How can we get the financial sector to stop soaking up the minds, bodies and money of the economy? Can regulation of banking compensation be a meaningful part of it?
It depends on how you define “meaningful part”. By far the most important things you need to do are things like increasing capital requirements and decreasing allowed leverage ratios, stricter evaluation of new and/or exotic assets, and so on. In other words, you need to make banking boring.
If banking is boring, you will see less capital attracted to banking, lower compensation in banking, and fewer high-intelligence/risk-seeking types attracted to banking jobs. Still, maybe at that point some bank compensation regulation will also make a bit of a difference. But the lion’s share of the necessary work has to be done at a different level.
September 23rd, 2009 at 10:05 am
DTM, Matt Y: has it occured to you that you lack the credibility needed with the rest of the party to actually make these arguments? Your faction has been bending over backwards in service of the financial sector for years. Even if you’re telling the truth now, the rest of us have every reason to assume that you’re lying for ideological reasons. You’ve done it plenty often enough in the past, there is just no reason to think you’re not doing it again now.
It is very easy for intelligent people to rationalize their ideology as being intellectually superior. Given the degree to which this plan conflict with your obvious objectivist ideologies, there is no real reason to believe that your ideology is not the source of your objections.
September 23rd, 2009 at 10:07 am
When you consider that almost every bank ever created in history has gone under, that maybe 1000 more American banks will, and that several giants are functionally bankrupt but kept alive through accounting legerdemain I think the proposition that banks make a lot of money is false.
Of course almost every business ever created in history has eventually gone under. That said, it is true that banking is an inherently high-risk industry, so if left unchecked banks will go through dramatic boom-and-bust cycles. Which, combined with banking’s crucial role in modern economies, is why we need to be regulating the bejeezus out of banks.
September 23rd, 2009 at 10:08 am
DTM, except you can’t actually know that because you don’t have a magical formula that will tell you how people will react to a given stimuli. You may think you do, but you really don’t. You have no clue if reforming compensation will work, all you have are ideological objections to it.
You don’t have a crystal ball, and you can’t actually see the future. You don’t actually know the things you claim to know. your passing ideological opinions off as some sort of gnostic knowledge you possess. It’s Bunk, and you know it.
September 23rd, 2009 at 10:09 am
Corporate governance is a hell of a lot more difficult than that. The ability of the shareholders to control the company works better in theory than in reality. Individual shareholders don’t always vote, there can be something like ‘regulatory capture’ by wining and dining major shareholders, and then there’s the business of paying various employees in company stock, thereby giving them the ability to vote themselves the treasury.
Saying the shareholders can fix things because they own the company is like saying we can reform health care because the Democrats are in power.
September 23rd, 2009 at 10:12 am
soullite,
The idea that you and I represent some greater factions within the Democratic Party or society at large is just a fantasy you concocted for the benefit of your own ego. The truth is that we are just two individuals on the Internet.
By the way, it is very easy for egotistical people to rationalize their self-glorifying emotional reactions as being indicative of some moral superiority.
September 23rd, 2009 at 10:13 am
Sept. 18 (Bloomberg) — European Union leaders said the Group of 20 nations should agree on binding rules backed by national sanctions to curb bank bonuses, a week before a summit of the top industrial and emerging nations in Pittsburgh.
The EU agreement on the need for action failed to include details of how such curbs would be achieved, leaving any details to be negotiated at the G-20 summit. Leaders of the 27 EU states said voters would react with anger if bankers were allowed to award themselves large bonuses while relying on public money for their survival.
“The bonus bubble burst,” said Swedish Prime Minister Fredrik Reinfeldt, whose country holds the EU’s rotating presidency, after chairing the meeting in Brussels late yesterday. “We have agreed to say that ‘enough is enough’ and that we need to move away from the current culture of compensation based on short-term performance.”
Leaders agreed that bonuses should be tied to a bank’s performance and that guaranteed bonuses should be avoided. The “major part” of bonuses should be deferred and “could be canceled in case of a negative development in the bank’s performance.”
Luxembourg Prime Minister Jean-Claude Juncker said that the U.S. and the U.K. don’t like the idea of imposing ceilings on bank bonuses.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7679BmVH8zA
September 23rd, 2009 at 10:14 am
ron @3 wrote: “There needs to be a clear understanding that banking is a government function that is franchised-out to private firms. That money that is lent is ultimately PUBLIC money.”
Banking doesn’t have to be a government function. But there does have to be a clear line between banks that can call upon public money (as with the FDIC), and banks that cannot. If you want to go with a personal investment bank that promises to earn you half a percentage point more than you get from the boring government-regulated bank, fine; but do so knowing that the reason you are getting the better rate is that there is a chance you will get NOTHING if the bank fails.
September 23rd, 2009 at 10:15 am
DTM, you don’t represent shit. You’re one dude on the internet. However, there are a lot of blue dogs just like you out there. don’t pretend you don’t stand with them, every argument you make is to further their interests.
We all have ideological interests. You’re just too scummy to admit thats what they are, so you pretend that your ideological views are the result of some superior intellect and knowledge when what they really are is class solidarity: you sticking up for other members of the elite.
September 23rd, 2009 at 10:17 am
You have no clue if reforming compensation will work, all you have are ideological objections to it.
I have no ideological objections to reforming bank compensation. Nor any objections, in fact–these deferred bonus and clawback schemes seem like a good idea to me.
I just doubt such reforms will really address the systemic risk issue. And that is based on my understanding the history of banking, and how over many, many different compensations schemes, it has remained true that banks have exposed the relevant society to systemic risks whenever they have been improperly regulated. Again, that is because of the essential nature of banking, so you have to address those more fundamental issues if you really want to prevent these banking crises from dragging down the rest of the economy.
September 23rd, 2009 at 10:18 am
soullite @13: “If they could get these people to do these things for less money, they would be doing so.”
You might want to look into who “they” are, and then ask yourself if there is any reason why “they” would want to pay high salaries. (Hint: Who sits on the boards of directors and compensation committees of the banks?)
September 23rd, 2009 at 10:19 am
It seems to me the real question here is whether banks are really all that profitable after all, and if they are, why. Sure compensation is insane, and sure there’s a moral issue involved. And sure we should raise taxes for people making unreal amounts of money. But it’s more likely that they are looting the system than anything else, and that American banking now exists primarily for that purpose.
September 23rd, 2009 at 10:21 am
Saying the shareholders can fix things because they own the company . . . .
That wasn’t my point. My point was that the shareholders don’t WANT to fix things, and eventually they are likely to get their way if we don’t prevent them from doing so.
So, I agree corporate governance can be a difficult issue. But I think it happens in this case to be wrong to blame corporate governance for the outcome, because I think the managers were basically doing what the owners wanted them to do.
September 23rd, 2009 at 10:24 am
DTM, you don’t represent shit.
And neither do you. But only one of us is vain enough to claim otherwise.
so you pretend that your ideological views are the result of some superior intellect and knowledge
You are obsessed with the notion that I am intellectually superior to you, a claim I have never made. Again, that is your own ego talking (in this case, an ego that feels threatened).
September 23rd, 2009 at 10:24 am
Great. After all the work done by Clinton, Yglesias wants to bring back the spite left.
Heh. As Matthew points out in his final sentence, he appears to believe that public policy should be based on Matthew’s level of infuriation.
September 23rd, 2009 at 10:28 am
Walker:
The reason banks make so much is because of leverage; they are investing money they do not have in the first place. This is exactly what got us into this problem into the first place.
This is the problem that needs to be solved; massive leveraging must be outlawed. As as side effect this will solve the pay problem (which is a symptom and not a cause).
I agree. Also, higher taxes to pay for the bailouts and extra regulation that’s needed.
ron:
There needs to be a clear understanding that banking is a government function that is franchised-out to private firms. That money that is lent is ultimately PUBLIC money.
Yes, banking is a special sector of the economy. Banking was regulated, so “entrepreneurs” created the shadow banking system which guaranteed higher returns for your money.
If firms have the potential to create systemic risk, they need to be heavily regulated. That will solve the moral hazard conundrum. We also need campaign finance reform regarding bankers and everyone else.
People who blithely say just let the too big to fail firms fail are divorced from reality. Everyone with even a tenuous connection to reality recognized what happened after Lehman collapsed. The crazy dinning room tables left and right just ignore the freezing of the credit markets, etc etc etc after Lehman collapsed. We also have the example of the Great Depression, which is what would happen if their careless advice was followed.
September 23rd, 2009 at 10:31 am
Perhaps after 2010 and 2012, you’ll understand just how out of touch you really are right now.
You best start attacking bankers, hammer and tongs. People want to hate them, right now they need to hate them. There is a whole lot of anger and rage about how things went down last year and how they have been going down ever since. Bankers get endless bonuses while 10% of the workforce is unemployed due to their reckless actions and another 10% is underemployed or simply no longer counted. If you don’t target that hatred where it belongs and give Americans the cathartic experience they need, then you’re going to pay for it big time. We all will.
These are very dangerous times. If you don’t give the people someone to hate, the Glenn Becks of the world are going to do that for you. Only if they do it, we’re the ones the American people are going to end up hating.
September 23rd, 2009 at 10:35 am
It’s not bank CEO comp that’s the problem, it’s the entire incentive structure down the line (i.e. huge commissions & bonuses for bank salesmen selling products w/o verifying customer suitability).
Additionally, there’s so much wrong/naive w/ Cowen’s analysis that it’s hard to know where to start. I’m not anti-academic, but I think a lot of academic commenters like Tyler (and the utterly ridiculous MM) would, be quite shocked if they actually spent a few days working on Wall Street. As Fischer Black put it: “Markets look a lot more efficient from the banks of the Charles than they do from the banks of the Hudson.”
September 23rd, 2009 at 10:37 am
DTM, I have an IQ od 138, I seriously doubt you’re intellectually superior to me. However, you clearly believe yourself to be intelligent, and you are to some degree. However, you use that intelligence as a reason not to consider views that aren’t a part of your world experience. You don’t use your intelligence to discover the world, you use it to force your perceptions of the world to fit your ideology. Look at the way you lazily avoid every argument anyone ever makes, the way you most often deny that you even have an ideological viewpoint.
This is standard psychology. Intelligent people have to be wary about their views, because that intelligence allows them to rationalize things a less intelligent person could never manage. I’m sure you’d like to think I’m obsessed with your intelligence, but I’m really just trying to point out a fact about reality you seem blithely unaware of. Hell, the argument you just made was a rationalization to avoid what I said. You managed to turn my statement about your tendency to twist new information to fit your world-view into a statement that I’m obsessed with your intellect. This allows you to confirm your view of yourself AND ignore any ifnormation which may conflict with that self-image.
September 23rd, 2009 at 10:40 am
All back to the social justice issue, when you have people signing their own checks it’s going to be hard to reform anything. It is going to take more than a wag of the finger and regulation to solve this one.
September 23rd, 2009 at 10:47 am
Soullite:
Matt proposes regulation to actually limit the power of the banks and you whine that he’s selling out. Again, WTF?
September 23rd, 2009 at 10:56 am
Matt proposes regulation to actually limit the power of the banks and you whine that he’s selling out. Again, WTF?
That’s her mode of operation.
September 23rd, 2009 at 11:03 am
If they could get these people to do these things for less money, they would be doing so. Since you don’t appear to have any real alternative course of action, your only purpose seems to be to say “But we can’t do that!”.
Maybe I wasn’t clear. I don’t know for sure that massive compensation packages had much, if anything, to do with the problems in the financial markets, although I wouldn’t rule it out by any means. But from what I can tell, nobody is making it impossible for these bankers to earn a lot of money, even possibly as much money as they would if had no rules in place. Instead, people seem to be trying to slow this process down so as to prevent people from walking away with big packages if their companies go under. If they perform well and according to the terms of their contract they deserve lots of money, so be it. Maybe I am misunderstanding the proposals or something, but it seems like a lot of people are confusing for a slow down in process with an outright ban.
September 23rd, 2009 at 11:15 am
What makes you think the Germans are paying taxes? http://www.dw-world.de/dw/article/0,,4233476,00.html How do you think Switzerland became Switzerland?
September 23rd, 2009 at 11:23 am
People who blithely say just let the too big to fail firms fail are divorced from reality. Everyone with even a tenuous connection to reality recognized what happened after Lehman collapsed. The crazy dinning room tables left and right just ignore the freezing of the credit markets, etc etc etc after Lehman collapsed.
Well, if we have to insure financial firms so that the whole system doesn’t collapse in a chain reaction of counterparty losses, we can damn well make them pay an insurance premium, the same as the FDIC. Otherwise we should rate all their instruments “unguaranteed” and require everyone to handle them accordingly: they have zero value on a balance sheet and can’t be used to satisfy a capital requirement until and unless they pay off. (Mark to market is too optimistic for speculative instruments – they wouldn’t exist at all if their originators couldn’t sell them for more than they were worth.) This will limit leveraged entities and banks from speculating and allow only equity-heavy entities to speculate, which is good because they have the strongest incentive to manage their risks since they’re actually exposed to them.
This whole business of letting institutions treat speculative instruments as reliable, leading to lemon socialism because too many people relied on their speculations, is just a more sophisticated probabilistic form of looting the treasury. If your gamble pays off, pay yourself a big bonus; if it doesn’t, declare bankruptcy and push the losses onto someone else (or the government).
There’s also a serious corporate governance problem, as several people point out. foosion at #10 suggests that instead of financial firms spending their enormous profits (in good years) on manager salaries,
They might use it to pay down debt or pay dividends to shareholders
But it’s the managers deciding between those courses of action, so it’s obvious which one they are going to choose. Shareholders have no effective power in corporate governance because of costs of information and transaction — except in closely-held corporations, which tend to behave quite differently since the owner-operator is gambling with his own money.
September 23rd, 2009 at 11:23 am
Another key to understanding the situation(simple but key):
Only the government can create new money. Yes it delegates this activity but it is ultimately the source of new money.
Therefore, the ways the government allows this new money to be used determines what kind of economy we have.
If the new money can be used for speculation or for nonproductive transactions that merely generate fees for banks, we have the current setup.
If new money could only be used for productive ventures, we could have a productive, equitable society.
Although there are many complications, this is the gist of the philosophical dichotomy.
September 23rd, 2009 at 11:24 am
> For one thing, the empirical evidence that this
> is really the issue is quite weak.
This is really quite similar to the argument over beer advertising. If modulating pay has such little affect on the performance of the Titans of Finance(tm), then why do they pay themselves so much? Why don’t they set salary caps, ala the NFL, and limit themselves to $2 million/year with 10 people eligible for a $10 million bonus? Relatively speaking the results should be the same, per Yglesias, and there would be more money to give to the shareholders (remember them – the owners?). Similarly a federal cap on banksters’ pay should not change their behavior in any way, again per Yglesias, so why are the banksters fighting it?
> For another thing, clearly the reason bankers pay
> themselves so much money is that banking firms
> make so much money
Not to sound too much like Petey, but if Mr. Yglesias has not yet figured out that the key question is whether Wall Street actually “made” a single penny from 1998-2008 or whether it was all smoke and mirrors + skimming, then I do fear that he may be hopeless.
Cranky
September 23rd, 2009 at 12:21 pm
If modulating pay has such little affect on the performance of the Titans of Finance(tm), then why do they pay themselves so much?
Because they’re paying *themselves*. Executive pay has conflict of interest written all over it.
The analogy to beer advertising would only hold if beer company executives also owned, or worked for, or got kickbacks from the ad agencies. Then they would have a strong incentive to buy lots of ads whether they worked or not.
Setting your own salary is logically equivalent to a 100% kickback. You spend the corporation’s money and collect the whole amount for yourself.
September 23rd, 2009 at 12:23 pm
Compensation is very important for reasons orthogonal to the amount of compensation. A very serious problem with compensation of bankers is that it encourages a short term bias as a huge amount turns to safe cash based on mark to market profits at the end of the year. A rule that compensation above some low level had to be of the form of shares which could not be sold would make a huge difference the next time the music is playing and bankers decide whether to dance. The fact is that bankers get more money in the end if they buy into a bubble than if they wait it out (if they sell into a bubble they are likely to be out of a job before it bursts so they get even less). Search Brad’s blog for “silicon valley compensation.” Notably, there have been a bit of profits made in silicon valley, but management compensation is very very different. On the whole the silicon valley approach seems to have worked better. If it was ussed there without being imposed by regulation, regulation might kick Wall Street to sillicon valley.
Oh and what about shareholders. Look managers can bend rules and give themselves safe money while making shareholders bear the risk. Shareholders can sue managers. It is lawyers for greed heads vs other lawyers of greed heads, not just gread heads against capturable bureaucrats. If the law says the guy can’t be paid that much in that way, no one can stop me from suing oh and demanding a jury trial (the amount in question will be more than 25$).
by the way “DTM Says:
You are right the high compensation is really just an income-splitting deal worked out between bank owners and bank managers . . . so why is it even “wrong”? ”
I’d say it is an income splitting deal worked out between bank managers. How exactly do the owners influence the process ? Look the big investment banks used to be partnerships so the owners were (some of) the managers and they divided up profits. Then they sold shares so that they were supposed to be employees. Now they only divide up two thirds of (correctly measured) profits. If at any point any shareholder decided that was optimal for shareholders, I missed it. I don’t see how anyone can imagine that the compensation of executives in the USA corresponds at all to a normal capitalist interaction between firm owners and employees. I mean what would it take to convince DTM that managers are able to take much more from shareholders than shareholders would choose to pay ?
September 23rd, 2009 at 1:08 pm
The word best describing the U.S. economic system is ‘crony capitalism.’ The banker (and other CEO) compensation indicates a great disparity between shareholders and management. Small shareholders are getting fleeced anyway.
For public (=share) companies, the actual owners are often common people (from the lower 99 percentile of the income distribution) through their pension funds, but they have practically no say whatsoever in matters of management compensation, which is decided between the overpaid and bribeable management of the pension fund and the management of the companies they invest your pension savings in.
Did your pension fund complain about some banks using a sizable part of the TARP for bonuses (at a time when there are obviously no profits to distribute, but only taxpayer money)?
September 23rd, 2009 at 1:41 pm
I say, do not limit Wall Street pay packages, but tax them!
What do I mean? Why not make a new tax bracket, income above $600,000 gets taxed at 45%, income above $900,000 gets 48%, income over $1.2 million gets 51% … income above $6 million gets a 66% Federal tax…
It should be perfectly fine to pay a trader $50 million in America, but Uncle Sam gets the royal 3/5ths…
September 23rd, 2009 at 2:08 pm
christopher at #25 has it right!
If banking actually helps funnel money to the places that will most efficiently use it then great. But if banking is just this stupid game where everytime the whistle blows every body reaches in and grabs a handful, then there is no reason for the government not to say “wait a second”. We don’t allow all profitable activities to exist, and we recognize when some profitable activities are harmful to society as a whole. If allowing such high bonus’ tend to decrease the efficient aspects of bank’s work, and increase the THIEVERY part, then the government has a resposibility to find ways to make such earnings less profitable.
I would prefer to see taxation at high rates for specific and worthless (to society) transactions, but I am satisfied if a condition of accepting government insurance would be to revamp compensation strategies, as well as to provide the pool for that insurance.
September 23rd, 2009 at 2:18 pm
DTM,
You’re confusing the bank’s owners with the bank’s board. If you look at the boards of banks, you see something odd – they are mostly made up of the bank’s executives. You also see that the board members own little stock in the bank compared to other corporation’s boards. The bank’s owners have very little say in what a bank does. The only decision they can make is to vote with their feet.
September 23rd, 2009 at 2:51 pm
In response to several comments directed my way:
I fully understand there is a corporate governance issue with respect to bank executive compensation (in fact, with executive compensation in general in the United States). And you might well think that corporate governance issue should either be resolved directly, or the outcome with respect to executive compensation should be regulated as a response.
However, that doesn’t contradict either of the two things I have suggested:
(1) To the extent there is a undue wealth transfer as a result of this issue, it is from bank owners to bank executives. In other words, any undue executive compensation is basically coming out of dividends. Again, I’m not saying there isn’t an undue wealth transfer, I’m just pointing out where it is coming from if there is; and
(2) There is no real reason to believe solving this problem will in any notable way change the excessive risk-taking behavior of banks absent regulations which directly address those issues.
So to sum up, as noted above I generally favor these ideas and agree they may be an appropriate response to a notable corporate governance issue. I just don’t think that amounts to a pressing moral issue, nor should it be considered a central part of dealing with excessive risk-taking by banks.
September 23rd, 2009 at 3:00 pm
DTM, I have an IQ od 138, I seriously doubt you’re intellectually superior to me.
Fine. But then why are you constantly bringing the subject up? I don’t care about our relative intelligence, so why do you?
Look at the way you lazily avoid every argument anyone ever makes . . .
Actually, I don’t avoid arguments, I respond to them. Ironically, it is your habit of pretending that people haven’t responded to your arguments that most closely resembles the very behavior you are criticizing here.
. . . the way you most often deny that you even have an ideological viewpoint.
I don’t deny I have a viewpoint, although I admittedly have never found a particular expressed ideology I consider satisfying.
Anyway, as here, generally you attribute a lot of statements and beliefs to me that I have never expressed. If you have to make up stuff like that just to have something to say, you likely don’t really have much to say in general.
September 23rd, 2009 at 3:43 pm
1) To the extent there is a undue wealth transfer as a result of this issue, it is from bank owners to bank executives. In other words, any undue executive compensation is basically coming out of dividends. Again, I’m not saying there isn’t an undue wealth transfer, I’m just pointing out where it is coming from if there is; and
(2) There is no real reason to believe solving this problem will in any notable way change the excessive risk-taking behavior of banks absent regulations which directly address those issues.
But of course this is a method to attempt to discourage extreme risk taking especially the type that is not in the long term interests of the institution doing the risk taking. The institutions should welcome this type of regulation, as it benefits them as well (both by limiting their exposure, and by not forcing them to chase short term profits at the expense of long term health in order to compete).But what other regulations could directly address these issues? After all, you can’t really define TOO RISKY long term risk, you can only make people unable to benefit from the short term benefits of it without having to face the long term detriments.
I am interested in other ways to eliminate short term profit that is too risky long term. Got any ideas?
September 23rd, 2009 at 3:47 pm
German bankers pay higher taxes to finance a welfare staate? In which fairytale world are you lifing. The German welfare staate is financed by the middle class. The upper class does not support it. Our capital gains taxes are 25% for those that actually dont evade them and our tax rate is higher for those that earn arround 600000 Euro than for those that earn a million a year. You would make a good FDP member.
September 23rd, 2009 at 3:53 pm
[...] UPDATE: Matthew Yglesias [...]
September 23rd, 2009 at 4:19 pm
When I met yesterday with some smug, arrogant, unapologetic Germany bankers I found it much less infuriating that meeting with smug, arrogant, unapologetic American bankers because I know the Germans are paying higher taxes and those taxes are going to finance a much more generous welfare state (bailouts for normal people, if you will) than we enjoy in the United States.
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As written by a smug, arrogant, unapologetic American blogger
September 23rd, 2009 at 4:26 pm
But of course this is a method to attempt to discourage extreme risk taking especially the type that is not in the long term interests of the institution doing the risk taking.
Again, your implicit assumption is that bank owners don’t want to take these risks. There really is not a lot of basis for that assumption, particularly when you look at the history of banking. Basically, the problem is that banks are almost always playing with other people’s money in one way or another, so it becomes virtually impossible for the bank owners to internalize all the risks they are taking. Instead, you have to just step in and coercively prevent them from taking excessive risks, because an incentive-based approach is doomed to failure by the nature of banking.
But what other regulations could directly address these issues?
The most all-purpose banking-risk regulations are capital requirements and leverage ratio limits. The nice thing about such regulations is that you don’t need to know exactly what risks banks will be taking in order for them to be helpful in moderating the effects of those risks if they materialize.
September 23rd, 2009 at 4:42 pm
of course capitalization requirements are valuable, as are limitations on leverage. But there is a diffference between what is good for the banks(there are no “bank owners”, there are stockholders which are an entirely different animal) and what is good for the bankers and that is the point I am trying to make. Although bankers can play the “I’ll be gone by then ” card, banks can not (and therefore do not “want” to take on long term losing risks). therefore, the institutions themselves should approve of regualtions that minimize sacrificing long term health for short term profits.
Again how do you coercively minimize risks while allowing them to be banks. One good way is to remove much of the incentive that EMPLOYEES of the bank have for making overall unprofitable transactions that make short term profits without long term benefits. These are the transactions that do harm to the entire economy, and that all banks are forced to engage in to keep up with those that “want” to. And these are the sort of things that employees bonus’ are currently based on, short term profits without long term accountability. Anything that makes employees of banks (and actually all corporations) more focused on long term rather than short term growth would be positive changes for our economy.
September 23rd, 2009 at 6:03 pm
http://www.reuters.com/article/ousivMolt/idUSTRE58M2QU20090923?pageNumber=1&virtualBrandChannel=10522&sp=true
Pay comparison.
September 23rd, 2009 at 9:59 pm
But there is a diffference between what is good for the banks(there are no “bank owners”, there are stockholders which are an entirely different animal) and what is good for the bankers and that is the point I am trying to make. Although bankers can play the “I’ll be gone by then ” card, banks can not (and therefore do not “want” to take on long term losing risks).
I think you need to put these two thoughts together. You are right to emphasize that the banks’ owners are often stockholders, and stockholders are not necessarily people planning to be around in the long run. So whether or not the bank is going to fail eventually–and they all fail eventually over a long enough time horizon–isn’t necessarily a dominating concern for the bank’s stockholders at any given moment in time.
Also, I think it is important to understand that while risk-aversion is considered the normal condition of people, there are in fact people who are risk-seeking, particularly when you allow for people to be risk-seeking in certain compartmentalized aspects of their lives. Indeed, if this wasn’t true, you couldn’t sell lottery tickets, and Las Vegas wouldn’t exist.
So it isn’t actually sufficient to show that the long-term expected return of a bank’s behavior is negative in order to prove that the bank’s owners/stockholders would disapprove of that behavior. And that is because those owners/stockholders could be risk-seekers for whom that is not a dealbreaker.
September 24th, 2009 at 12:58 pm
[...] Yglesias doubts if banking pay structures had much to do with the crisis and believes we should just get on with taxing the bankers. Yglesias highlights and dismantles a [...]