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Bankers Bonuses

Discussion in 'Serious' started by AoE, 7 Feb 2012.

  1. Margo Baggins

    Margo Baggins I'm good at Soldering Super Moderator

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    I think what is more criminal in the public sector is the huge amount of public money that is wasted. I took one of the directors of a quango I used to work for to a disciplinary with the board due to his complete irresponsible waste of public money due to his unwillingness to listen to junior's advise (ie. the people spending the money on their orders). I don't really get on in the public sector, I don't think I want to go back ever.
     
  2. Carrie

    Carrie Multimodder

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    Likewise the NHS (being a public institution not driven by market competition and therefore incomparable) but you still managed to slip it in there didn't you you little devil ;)

    Well if you can get the global banking industry to restructure their remuneration policies on the basis of ethics you'll have earned yourself a "Sir" at a minimum. Good luck with that :thumb:
     
  3. Nexxo

    Nexxo * Prefab Sprout – The King of Rock 'n' Roll

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    That would suggest that you think their remuneration policies are unethical, which is a whole other debate. I'm not arguing that; I'm arguing that they are irrational.
     
  4. Carrie

    Carrie Multimodder

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    Irrational? Funny, I thought you were arguing they shouldn't get bonuses because they get salaries.

    As to whether it suggests I think their remuneration policies are unethical, to reach that conclusion would require me to have what you'd consider popular ethics in the first place, entirely a different debate ;)
     
  5. adidan

    adidan Guesswork is still work

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    Bonuses related to performance, I think that's what's been missing.

    Crap, what have I done? That was pretty topic related.

    Damn.
     
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  6. Carrie

    Carrie Multimodder

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    Lol, don't tell me you work for the NHS too Dan?

    Damn, mentioned the off-topic subject again :wallbash:
     
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  7. Nexxo

    Nexxo * Prefab Sprout – The King of Rock 'n' Roll

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    No (please keep up). I'm arguing that million-pound bonuses do not actually improve performance. There is no reason to pay them, except for company-cultural reasons which encourage a self-serving superstition that if you don't pay them out, you will get poorer performance or attract poorer performing employees.

    adidan has with his post summarised this and put the thread back on track.
     
  8. mucgoo

    mucgoo Minimodder

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    I think its fair to say if there was a high flying banker with a proven track record or alternatively a fresh faced graduate both would be inclined toward the firm which has a record of providing the better salary and within banking sector salary~bonuses.
     
  9. Carrie

    Carrie Multimodder

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    I beg to differ.

    Since bonuses (in the real world, not the public sector ;)) are usually contract based and contingent on targets being met, they are therefore performance related. They are also market driven otherwise lower bonuses would be paid.

    You seem to be implying generally in this thread that you don't feel their performance warrants that level of remuneration received. Whether true or not, that is not what Dan said.
     
  10. julianmartin

    julianmartin resident cyborg.

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    How on earth can you be sure it doesn't improve performance? You've already said you don't know for sure how banks work? The only thing you rely on is information from the US federal reserve with no reference so we cannot be sure of the context of that report. As I have already referenced anyway, the Federal Reserve is not a reliable source of information as it has vested interests, I.e. Not an independent study by any means.

    The top guys are still going to want 2 million a year if they are good at their job. That 1 million, will be paid somehow and the likelihood is if big bonuses get stopped, they'll be offered in share options, pensions or even straight salary. Don't forget that bonuses are partly to do with tax minimisation as well as performance.

    And to whoever was asking about conflicts of interest, I have clients slightly in the industry, that is all.
     
  11. Er-El

    Er-El Minimodder

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    I think the motive for million-pound bonuses lies with the employer, not as a reward for motivating better performance, but as an incentive to compete for the better worker, given that there is a surplus of demand for these skills. So it does demonstrate that it might not be perfectly rational, but that is still their rationale.
     
    Last edited: 8 Feb 2012
  12. MiNiMaL_FuSS

    MiNiMaL_FuSS ƬӇЄƦЄ ƁЄ ƇƠƜƧ ӇЄƦЄ.

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    Marget Thatcher essentially fixed the last recession by making major cuts and (far more importantly) by loosening the reigns on 'the city'. Essentially meaning that the rules and regulations around the financial sector in Great Britain were relaxed and we were pulled out of recession by large multi-national corporations (such as the banks) being allowed to do more or less as they please.

    This is a very rough and ready summary, but essentially this is where the route of the so called banking problem begins.

    What we have now, is a recession caused (in part) by the cure of the last recession. The very conservative government that promoted the financial sector as the answer to our problems, is now highlighting them as a scapegoat. But let's remember that around 95% of the conservative party funding comes from....you guess it...'the city'.

    So will the conservatives continue to blame greedy bankers for our problem publicly...yes.
    Will the conservatives be driven by bankers behind closed doors...yes.
    So will anything actually substantial change in the financial sector...no.

    Debates about banker's bonuses are nothing more than the usual political theatre. Your average daily mail reader may blame bankers for everything under the sun and think their bonuses need stopping; but in reality it's a market driven sector and if we were to place legislative limits on bankers bonuses we'd simply cripple our own economy by handicapping one of our countries leading sectors. So it's a pointless argument.

    This doesn't mean I agree with bankers bonuses, however if you want realistic bonuses , reduced in size and that are actually tied to performance - then it needs to be on a global scale. If you just hit the UK bankers, then the money will move oversees and we'll have screwed ourselves. Remember that the UK is generally regarded as a tax haven by much of the world, the financial sector is on the whole a massive asset to our economy, and largely because of the freedom we allow it to operate with.

    Oh and let's be honest here, would you take a huge bonus if it was handed to you - yes you bloody would!

    On a lighter note:
    For anybody that's struggling with the concepts generated by the economic crisis, I heartily recommend South Park Season 13 Episode 3 (Margaritaville), it does a fairly good job at explaining the debt crisis in a straight forward way.
     
    Last edited: 8 Feb 2012
  13. Nexxo

    Nexxo * Prefab Sprout – The King of Rock 'n' Roll

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    Of course I would. It would be irrational to turn it down. :D
     
  14. MiNiMaL_FuSS

    MiNiMaL_FuSS ƬӇЄƦЄ ƁЄ ƇƠƜƧ ӇЄƦЄ.

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    I agree that bonuses are irrational, but you'd have to tackle them globally to fix the problem, otherwise you're just culling our financial sector for no apparent reason other than to satisfy public opinion.....which will now care far more about the Football Association than bankers...
     
  15. Da_Rude_Baboon

    Da_Rude_Baboon What the?

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    That is a very good video but it chooses to completely avoid the fraud that was a major factor in the catastrophe. I think it is vitally important for everyone reading this to understand how this happened and not to get side tracked on the issue of bonuses and remuneration. I will answer some of the posts and point out where the fraud happened.


    Fraud number one. It has been mentioned that people were idiots or irresponsible for taking out mortgages they couldn't afford. People where miss sold mortgages by unscrupulous brokers. The real costs of the mortgage were hidden in the small print, low interest teaser rates were offered for a few years which then increased dramatically or people where out right lied too. In world of credit you have what’s called a thin file candidate and a fat file candidate. A fat file candidate has a long credit history, a thin file candidate a short credit history. So long as the credit rating is good the system does not differentiate between fat and thin so you can manipulate the system by giving some one with no credit history a small loan which they quickly pay back. Who has a thin file and little knowledge of personal finance? In the case of the US newly arrived immigrants were the perfect people to exploit and miss sell a mortgage too. This leads to a very pertinent question?

    Why sell a mortgage to someone who clearly can't afford it?

    The broker carries no risk. They make a few hundred dollars commission from selling he mortgage and pass it onto the lender. The lender packages up the mortgages it has sold into groups and sells them as bonds to investors. (For simplicity we will assume a mortgage bond contains 100 mortgages.) They then pass the risk onto investors.

    Fraud number two. A conventional mortgage, known as a prime mortgage, was only given to those who met the lending criteria. i.e. they could afford it so there was little risk. In the US the mortgage was effectively underwritten by the US government so the credit rating agencies gave it a AAA rating. The best you can get. The AAA rating is vitally important here as a lot of investors, pension funds specifically, will ONLY invest in AAA rated bonds.

    An unconventional or high risk mortgage is known as a sub prime mortage. A subprime mortgage is a risky investment and will therefore be given a low rating, CCC being the lowest. The market for high risk investments is small so what do you do with these CCC rated mortgages? You can package up the high risk mortgages with the low risk mortgages in a bond, so long as you keep the average risk low enough you will still get the AAA rating. So going back to our bond made up of 100 mortgages, if we have 80 AAA rated mortgages we can include 20 CCC rated mortgages and still keep the AAA rating. Again this is very important. When the subprime mortgage bubble burst in the US, share holders where asking banks are you exposed to this? RBS for example didn’t lend subprime mortgages but they did trade in mortgage backed bonds. The bonds they had been buying where all AAA rated therefore if they did contain subprime mortgages it would be a small amount and their exposure would be small. This is exactly what RBS thought and reported back to share holders at the AGM.

    Wall Street had a problem. The market for mortgage backed bonds was booming but they had far more CCC sub prime mortgages than AAA prime mortgages so they couldn’t bundle them together and make AAA rated bonds. A small team of financial geniuses in Goldman Sachs created a new type of bond, made of entirely CCC rated sub prime mortgages. This bond was highly complicated and intricate and it is believed that very few people could actually understand what it was. It looked on the outside like a conventional mortgage bond and was given a AAA rating by the rating agencies. Through financial alchemy they were turning lead into gold and made billions of dollars. The false rating left investors who would not touch anything less than a AAA rated bond completely exposed to the subprime bubble. Pertinent question number two.

    Why did the rating agencies give it a triple AAA rating?

    Wall Street attracted all the best employees. If you worked in finance and you were good, you worked on Wall Street. The rating agencies in effect were left with everyone else. They also paid poorly and offered poor career prospects compared to Wall Street. The rating agency employees worked with one eye on a Wall Street job and this was exploited. You had a situation where poorly trained, under funded employees eager to impress were rating bonds that would have confused some of the finest minds in the entire financial sector. This weakness was ruthlessly exploited.

    Before I go any further we will need a short introduction to the Credit Default Swap or CDS. A CDS is an insurance policy against an investment. On the face of it, it sounds quite sensible and reasonable but to me it’s just outright gambling. I will use an example to explain how they work. Company A wants to expand and asks their bank for a $100 million loan to be paid back over ten years. The bank does not want to lend that much but also doesn’t want to loose a valued customer so it issues the loan and then takes out an insurance policy, or CDS, against company A defaulting. Another bank agrees to insure the loan at the rate of $200 thousand per year for ten years. So if company A pays back the loan it costs the first bank $2 million in insurance payments over the ten years and the second bank has made $2 million! If company A defaults on the loan, the original bank gets it’s $100 million back, but the second bank lost the bet and looses $100 million.

    Seems sensible enough but here’s the crazy part. In conventional insurance only the owner of the item being insured can take out an insurance policy. In the world of the CDS anyone can take out insurance against any investment. So in the previous example if ten investors take out a CDS against company A. If it defaults on its loan $100 million is paid out ten times.

    During the subprime bubble a handful of investors and fund managers (Wall Street insiders believe less than twenty) realised exactly what was going on and started to take out CDS against the mortgage bonds. The risk of the bonds failing was considered so low (they all had the magic AAA rating remember) that CDS were issued at very low cost. The fund managers bought billions of dollars worth of CDS, the more they bought the more the rest of Wall Street noticed and caught wind of what was happening.

    Fraud number three.

    Goldman Sachs were still working their alchemy and selling fraudulent AAA rated bonds to investors while at the same time taking out CDS against them as they knew they were going to fail. They where actively rigging the system to fail and betting against their own customers.

    The bubble burst. Suddenly investors saw what they thought were AAA rated investments fail and billions were lost. Then the CDS kicked in and the losses grew exponentially and the financial institutions began to fall. A crisis became a catastrophe.


    Thanks for that Eddie. The way the US mortgage system worked is quite alien to me and I never fully understood what Fannie Mae et all did. I agree with Eddie that government intervention disrupted the self regulation of the market. Capitalism is, in effect, economic Darwinism and the government intervention is interfering with the process. Bailing out Wall Street has left the lesson that so long as your too big to fail the government will bail you out.

    Back to bonuses this link is an interesting read. Bonuses are not a bad thing if implemented correctly and used to encourage sustainable growth and not short term gain for the employee at the long term expense of his employer. The public are rightly annoyed that those who caused the crisis are not being punished and received huge payouts. Where is the justice in that? They should be in prison. However bonuses are a convenient side show to stop us looking at the real problem. We need to reintroduce regulation back into the market.
     
  16. benji2412

    benji2412 <insert message here>

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    As much as people have a go at the banks we should at least highlight and remember the stupidity of some of the general public in accepting so much credit, forgetting it was that - credit.
     
  17. StingLikeABee

    StingLikeABee What's a Dremel?

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    That's very true, and something that more people would do well to remember. There is too much of a buy now, pay and worry later culture in our society today. People behaving no better than spoiled brats, with their never ending "must have" buying habits. I was brought up with the "can't afford, go without" mentality, so avoid credit wherever I can. Too many people today end up over-stretching their finances, just so they can add a few inches to their penis extensions, like bigger, faster or sportier cars for example.
     
  18. DXR_13KE

    DXR_13KE BananaModder

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  19. eddie_dane

    eddie_dane Used to mod pc's now I mod houses

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    The best material I have read on this topic is The Housing Boom and Bust by Thomas Sowell. It documents this entire process in excruciating detail and is a long read but if you want the highlights, you can watch this interview with him.
     
  20. Da_Rude_Baboon

    Da_Rude_Baboon What the?

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    That culture exists and has been encouraged by government to hide the fact that wages have been in a long term decline. I think we should also make a distinction between people who borrowed irresponsibly and those who were conned into borrowing irresponsibly.

    Cheers Eddie, I will check it out.
     
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