The Old Pay System of Wall Street
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Last weekend, we discussed issues of Wall Street compensation and liability in placing a natural limit to excessive risk-taking: Delay Pay? Try Partnership Liability.
This week, Floyd Norris received an email from a retired investment banker regarding what Wall Street compensation used to look like, and why that curtailed excessive behavior, and private gains, socialized losses:
“The old pay system (era of John Whitehead): you work at an investment bank for 30 years, have a reasonable draw and cash bonus, build up stock in the firm as most of your bonus, and when you decide to retire you request of the partners their permission to go limited. If they assent, you get to withdraw your money over five years, all the while continuing to expose the balance to the risks of the enterprise.
The new pay system post-Donald Lufkin Jenrette’s original I.P.O.: you’re a young 29-year-old punk playing with OPM (Other People’s Money), taking huge risks for which you get huge bonuses, while the outsiders shoulder the losses on your bets. You make all the money you’ll ever need in three years, stay around 15 years to pile up five times as much as you need, and then you retire with your cash hoard, buy a winery in Napa/Sonoma or a huge farm in Connecticut, living above the fray for the rest of your life.
Which system, do you think, makes people consider the downside of their actions?”
Note once again the impact of partnership liability — a negative incentive towards speculation — on banker behavior.
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Source:
Old Wall Street Discusses the New
Floyd Norris
Notions on High and Low Finance June 21, 2010
http://norris.blogs.nytimes.com/2010/06/21/old-wall-street-discusses-the-new/
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June 27th, 2010 at 9:17 am
Which system, do you think, makes people consider the downside of their actions?”
or better yet-
which system do you think Wall Street wants?
big bucks and socialized losses- what’s not to love?
June 27th, 2010 at 9:35 am
Let’s see — take what I can right now without fear of being held to any standard of acceptable, ethical, or legal standard and/or fear of consequences, or wait until I retire at 65. Hmmmmm . . . the right thing or the easy thing? I wonder which path most would choose . . .
June 27th, 2010 at 10:40 am
Introducing clawbacks to all levels of employees that are responsible for OPM or the existence of the firm and I’m guessing you will have the same effect. The problem, of course, is instituting this and having shareholders that aren’t complacent enough to demand enforcement. The quiet problem here is the lack of involvement in firms of major shareholders. Other than that, the previous commenters are spot on.
Regards,
TDL
June 27th, 2010 at 11:01 am
Based on the just finished “financial regulation”, I’d say the chances of getting this reform is… ZERO. I still say the only chance to do anything on compensation, and not just financial firms but all corporations, is to make mutual fund managers responsible. They are the only group with the voting power to counter balance the insiders who run the companies for their own benefit.
June 27th, 2010 at 11:53 am
all of these post-facto: “the Horse is Gone”–psuedo-clever ‘insights’/muted wailings(as found in the Post) are tedious, in the extreme..
you know, ‘for a “Change” ‘. maybe we should dial 1-800- RENT-A-CLU ..
from such a Service we may find, actual, useful vectors for comprehension..
like, from above comments: “which system do you think Wall Street wants?
big bucks and socialized losses- what’s not to love?”–Ahab
and: “Based on the just finished “financial regulation”, I’d say the chances of getting this reform is… ZERO. I still say the only chance to do anything on compensation, and not just financial firms but all corporations, is to make mutual fund managers responsible.”–ACS
maybe, Floyd’s next epiphany will pertain to the, en masse, de-Mutalization of Insurance Co.s..
http://www.thefreedictionary.com/epiphany try def. #3
LSS: peep don’t Stripmine their Backyards..
June 27th, 2010 at 12:19 pm
The other side of the coin is board’s are good ole boy networks that do not represent shareholders’ interests. They too are in it for the free ride. Do not rock the boat. The CEO picks the board and they rubberstamp executive greed.
Just agreein’.
June 27th, 2010 at 12:39 pm
Goldman will never go back to the partnership “gentleman’s club” financial structure. Those days are gone forever. What replaced them is a financial system where risk is levered to the max on every transaction.
We didn’t learn when Long Term Capital (their collapse looks almost quaint by today’s standards) blew it’s self up with leverage and unaccountability by it’s greedy lenders, and until there are strict regulations in place to limit leverage/raise capital and reserve requirements we will be doomed to more of the same.
June 27th, 2010 at 1:15 pm
It’s not just Wall Street. Ask a retired CEO/CFO of a manufacturing company (remember those?) CEO realized compensation (salary + exercised stock options) has more than quadrupled in constant dollars since 1970.
Another alternative that’s been generally dismissed is to require U.S. CEOs to post performance bonds. But in our culture where CEOs have become celebrities, performance metrics have a funny way of staying fuzzy.
June 27th, 2010 at 3:31 pm
Now I want to kill my h.s. guidance counselor because when I asked him about the jobs that A) didn’t require 10 years of training and B) allowed to retire wealthy after 3 years and filthy rich after 10-15, he didn’t tell me about jobs on Wall Street! That s.o.b. probably “saved” those jobs for his own kids!
June 27th, 2010 at 5:20 pm
This what happens when you ask your government leaders (professional politicians) to fix problems for you.
They socialized the losses and further strengthen the Industrialists with their “regulations”.
BR gave the new regulation a C minus with many parts of it graded “F”. So today the President is
telling us how great it is. He’s clueless.