UBS $37B Write Down, Part II: Compensation

Buried at the end of the report discussed earlier is the specific criticism of the financial compensation system in place at UBS for traders and the engineers of structured products.

The bigger question is how little their quaint little system differs from any other large bank or brokerage firm on Wall Street. Remind me to ask Johns Thain & Mack about that.

Excerpt:

6.3.8 Compensation

UBS has identified the following contributory factors related to compensation and incentives:

Structural incentives to implement carry trades: The UBS compensation and incentivisation structure did not effectively differentiate between the creation of alpha (i.e., return in excess of a defined expectation) versus the creation of return based on a low cost of funding.

Asymmetric risk / reward compensation: The compensation structure generally made little recognition of risk issues or adjustment for risk / other qualitative indicators (e.g. for Group Internal Audit ratings, operational risk indicators, compliance issues, etc.). For example, there were incentives for the CDO structuring desk to pursue concentrations in Mezzanine CDOs, which had a significantly higher fee structure (approximately 125-150 bp) than High-Grade CDOs (approximately 30-50 bp).

Insufficient incentives to protect the UBS franchise long-term: Under UBS’ principles for compensation, deferred equity forms a component of compensation that generally increases with seniority. Essentially, bonuses were measured against gross revenue after
personnel costs, with no formal account taken of the quality or
sustainability of those earnings
.

 

Gee, with that compensation structure in place, how could anything possibly go awry . . . ?

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Previously:
Report on UBS’ $37 Billion Writedown
http://bigpicture.typepad.com/comments/2008/04/report-on-ubs-3.html

Related:
Bankers’ pay is deeply flawed
Raghuram Rajan
FT, January 8 2008 18:04
http://www.ft.com/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html

Category: Corporate Management, Derivatives, Wages & Income

Report on UBS’ $37 Billion Writedown

Category: Corporate Management, Credit, Derivatives, Finance, Fixed Income/Interest Rates, M&A

Friday Evening Jazz: Dexter Gordon

FNJ has a guest DJ tonite: BondDaddy is in the house!

Dexter Gordon is one of the greatest tenor sax players. He had a strong tone and incredible sense of melody. Some players like Sonny Rollins and Joe Henderson had a slippery sense of time; their phrases speed up and slow down, moving within the rythm section’s accompaniment. Not Dexter. Dex’s time was rock solid, never wavering. The rythm section had to accompany his time.

Our_man_in_parisHis playing is incredibly melodic, easily followed by the listener. Ideas naturally morphed from one to the other, always following a logical pattern. However, he was also able to surprise listeners with a run into upper chordal extensions.

His playing provides a logical link between Parker and Coltrane. Dex used many ideas from Parker, but played them with a tone that was deep, bold and soulful.  His tone provides the link to Coltrane, who also favored a deep and rich tenor tone.

Gordon swung — and swung hard. If your feet are not tapping within 8 bars of his starting to play, you’re just not listening.

Our Man in Paris:
This be-bop session is a meeting between three of the most influential
musicians of the forties. The rhythms crackle, the solos fly; Our Man
In Paris is essential Dexter. A nice compilation of standards.

HomecomingHomecoming: Live at the Village Vanguard. Dex lived in Amsterdam for about 10 years, and this was the album be made when he came back. Very cool set. Woody Shaw is on Trumpet, and the two work really well together. THis is Dexter at the very top of his game (and probably one of the top 25 live jazz albums of all time).

He also starred in the Round Midnight, probably the best jazz movie ever made

Go:  Its been widely reported Gordon himself considered this his greatest achievement. Brimming with conviction and poise, Gordon’s gentle-giant sax carries itself with a sort of graceful edge that is difficult to emulate. Never has anyone made the diminished scale sound so musical.

Ballads

Ballads: This is a compilation of his ballads (duh), and he could play just beautifully on these. Gordon delivers his almost sleepy and smoke-filled solos with real grace. Some of the most romantic playing you will every hear.

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Videos after the jump

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