Freitag, September 04, 2009

Meddling Once Again...


Government's just can't help but meddle. Especially where they have no business.

There's a letter in today's FT that warrants a fisking. But I just don't have the time or even the patience to do it correctly, so I'm just going to cover the reasons why the letter is so patently absurd.

The reason for the financial crisis wasn't high salaries in the financial business world, but rather well-intentioned but, in the long-term, catastrophic government policies that set up the crisis, coupled with a failure of financial oversight committees and agencies to both slap down rating agencies from indulging their clients with favorable ratings and with ensuring that non-bank financial organizations were being run prudently.

Remember that.

Now, the letter basically states that since the governments bailed out the banks, that the banks can't bloody well go back to business as usual when the crisis is over, but must listen to their new masters and start treating their staff like the peons they're supposed to be. The politicians involved think the bonuses are obscene and the salaries inflated, largely because it's hard to get re-elected by the unemployed when the people you bailed out - after setting them up for the failure - are raking in the bucks.

Well, I got news for the Financial Ministers of Sweden, The Netherlands, Luxemburg, France, Spain, Germany and Italy: you can probably force the banks to cut their salaries and eliminate the bonuses forever, but you're going to end up with different banks than you started out with.

I work in the financial world, but I don't earn a huge salary like some are making. I don't add enough value (I'm working on changing that!) to justify it.

What do I mean by that? Simple: the products that I either make or contribute to, while in demand and extremely useful to our clients, don't generate enough money for me to be paid more. I'm not going to go into detail - besides, it's none of your business - but that's the fundamental nature of how salaries are paid.

Companies in the financial world don't pay high salaries and/or very large bonuses because "it's in their culture" or because they're supposed to: they do so in order to retain their workers, and they do it because the available pool of workers with the qualifications and competencies are extremely limited. They employ people that are from the longer part of the tail, and there really are very few folks out there who can actually do things like create new hedge funds and the like successfully and profitably.

Lose those people and you have to train new ones, and in the meantime you are unsuccessful in that business and hence not profitable.

Hence the salaries we see out there in the financial field are market salaries: there is little or no loyalty out there, with investment bankers more than happy to switch companies (and hence loyalties) at the drop of a hat, taking their entire staffs with them. It is a sellers market as well, with even the newest and least experienced trainees out there commanding decent salaries well in excess of what their non-banker counterparts are earning.

What the politicians are complaining about is that there isn't a system of malices in place, where those who were successful can also be penalized and fined for not being perfect performers.

Well, duh: if there were such a system then no one would take any risks that had even the remotest possibility of generating personal losses. I know folks who work purely on a bonus system, with their "normal" income rather nominal and barely above minimum wage, who yet earn millions every year: they know in a bad year they will earn virtually nothing. But they're willing to work thus because of their enormous upsides, which allow them to compensate for horrible years by having earned millions during better years.

They work this way because it's what they love doing, but they also work like there is nothing else in their life (and more often than not this is true) and think nothing of working through weekends and holidays, crunching the numbers and working out the deals in order to make their millions.

Let's think, if you will, of what the world would look like if the Ministers had their way: moderate salaries, no bonuses. Make roughly the money of a government worker.

Why would anyone become a financial specialist, then?

You'd have banks that take forever to work out a financial deal; you'd have banks where no one could, would or should make a decision on their own, relying instead on consensus decision-making that need multiple meetings and weeks to make a decision that is currently made in a single day.

You'd have banks that were unable to switch focus and meet their client needs, since that requires initiative and risk-taking.

You'd have banks that would be even more reliant on external risk assessors (rating agencies) or even more reliant on subjective judgements on whether a company should get a loan (which have cost companies hundreds of millions due to corruption and incompetence).

You'd have banks that were increasingly indistinguishable from each other, since the lack of highly competent workers would become more reliant on "best industry practices" that would be the same industry-wide, leading to a lack of differentiation.

You'd have banks incapable of discovering and providing new financial instruments to meet specific needs.

You'd have banks that would work like the government does.

This kind of meddling - political grandstanding, envy politics, sheer bloody-mindedness - is the same kind of meddling that brought us to this situation. Remember: the banks didn't get into trouble on their own. They were led there by misguided policies and fiercely prodded to dig their holes deeper and deeper to meet politician's needs.

So why should the banks listen now?

There is only one reason: because the governments own the banks. But then there's no need for this sort of grandstanding, unless you realize what it is really about: getting votes from the new unemployed by slapping someone else around for their amusement and benefit.

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