Comments on: Wall Street Bonuses are Not the Real Issue http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/ Basab Pradhan's weblog about business and life in a 'flat world'. 6 AM Pacific is the best time for a global conference call. Sat, 13 Mar 2010 08:05:18 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Ashok http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16817 Ashok Tue, 02 Feb 2010 14:23:13 +0000 http://6ampacific.com/?p=530#comment-16817 When the Politician , Business man and Market regulator becomes best of buddies , start dining together and nodding head in heartful applause its time to sense the trouble .It then becomes a binge where blind leads the blind . And in case of Paulson and Greenspan they were part politicians, part businessmena and part market regulators in different Avtars ......what else could you expect ??? When the Politician , Business man and Market regulator becomes best of buddies , start dining together and nodding head in heartful applause its time to sense the trouble .It then becomes a binge where blind leads the blind .

And in case of Paulson and Greenspan they were part politicians, part businessmena and part market regulators in different Avtars ……what else could you expect ???

]]> By: Basab Pradhan http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16475 Basab Pradhan Fri, 06 Nov 2009 05:08:51 +0000 http://6ampacific.com/?p=530#comment-16475 Radha - I am not saying that Capital Markets don't add real value. Allocating capital where it is most efficiently used is of enormous value to the economy, even though it may be perceived to be just "moving money around". But there is something going on, which is probably regulatory in nature, which has allowed it expand unfettered. For instance, the regulatory framework protects the three credit rating agencies which allows these analyst firms make lots of money on debt instruments when their counterparts in the equity markets make much less in a highly competitive industry. Sometimes the regulatory structure of an industry can cause it to expand without any resistance. Healthcare is one such example. Is Wall Street another? That's the question Radha – I am not saying that Capital Markets don't add real value. Allocating capital where it is most efficiently used is of enormous value to the economy, even though it may be perceived to be just "moving money around". But there is something going on, which is probably regulatory in nature, which has allowed it expand unfettered. For instance, the regulatory framework protects the three credit rating agencies which allows these analyst firms make lots of money on debt instruments when their counterparts in the equity markets make much less in a highly competitive industry.
Sometimes the regulatory structure of an industry can cause it to expand without any resistance. Healthcare is one such example. Is Wall Street another? That's the question

]]> By: RadhaJ http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16474 RadhaJ Thu, 05 Nov 2009 19:45:20 +0000 http://6ampacific.com/?p=530#comment-16474 Basab. I agree with the point that the tremendous growth in capital markets has facilitated the rise in salaries. This is a wonderfully elegant explanation that has the value of being applicable to other contexts. However, I dont view this growth of capital markets as unhealthy. Permit me to restate the unoriginal (but unpopular) view that capital markets connect people with money (and perhaps no ideas) to people with ideas (and perhaps no money). So, they are key to democracy, like the circulatory system is to the human body --- "doesnt make anything" by itself, but facilitate others to do what they want to do. The use of (Wall and Dalal) street funding to expand microfinance in India, eg. <a href="http://online.wsj.com/article/SB125650454944206667.html," target="_blank">http://online.wsj.com/article/SB12565045494420666...</a> is an uncontroversial feel-good example of the utility of growth in capital markets. Less uncontroversial, but perhaps more impactful, is the role that capital markets played in the boom of the 2000s. Arguably, the world (and certainly the emerging third world) is better off with the boom. Money was certainly wasted (in 2000, 2008 etc) , and more transparency is certainly needed. But, is there a better alternative? Basab. I agree with the point that the tremendous growth in capital markets has facilitated the rise in salaries. This is a wonderfully elegant explanation that has the value of being applicable to other contexts.
However, I dont view this growth of capital markets as unhealthy. Permit me to restate the unoriginal (but unpopular) view that capital markets connect people with money (and perhaps no ideas) to people with ideas (and perhaps no money). So, they are key to democracy, like the circulatory system is to the human body — "doesnt make anything" by itself, but facilitate others to do what they want to do.
The use of (Wall and Dalal) street funding to expand microfinance in India, eg. http://online.wsj.com/article/SB12565045494420666... is an uncontroversial feel-good example of the utility of growth in capital markets. Less uncontroversial, but perhaps more impactful, is the role that capital markets played in the boom of the 2000s. Arguably, the world (and certainly the emerging third world) is better off with the boom.
Money was certainly wasted (in 2000, 2008 etc) , and more transparency is certainly needed. But, is there a better alternative?

]]> By: Krishna http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16466 Krishna Sat, 31 Oct 2009 17:44:07 +0000 http://6ampacific.com/?p=530#comment-16466 How high? As high as someone is willing to pay. That's something for the hirer to judge. The rule of "caveat emptor" prevails. Benchmarking compensation practices in financial industry with other industries is like comparing apples to oranges. Financial industry is a high stress industry and you will see it if you take a look at their balance sheets. Other industries have land and building, plant and machinery, patents, stock of raw / finished goods inventory, work-in-progress, cost of production, distribution and logistics etc., to account for as assets (with additions every year) and to provide for their depreciation etc. that blocks a huge proportion of their pre-tax profits from suffering tax knocks. Financial industry has no such tax shelters besides interest on loans that get charged off to their revenue. So there will be a huge surplus left (during the upcycle years) that will face a full tax slap and it is prudent to use it to reward high performing employees generously that can ensure deal pipelines to remain full. The industry runs on the individual, his contacts and his foresightedness much more than the organizational clout and outreach that other industries enjoy. How high? As high as someone is willing to pay. That's something for the hirer to judge. The rule of "caveat emptor" prevails.

Benchmarking compensation practices in financial industry with other industries is like comparing apples to oranges. Financial industry is a high stress industry and you will see it if you take a look at their balance sheets. Other industries have land and building, plant and machinery, patents, stock of raw / finished goods inventory, work-in-progress, cost of production, distribution and logistics etc., to account for as assets (with additions every year) and to provide for their depreciation etc. that blocks a huge proportion of their pre-tax profits from suffering tax knocks. Financial industry has no such tax shelters besides interest on loans that get charged off to their revenue. So there will be a huge surplus left (during the upcycle years) that will face a full tax slap and it is prudent to use it to reward high performing employees generously that can ensure deal pipelines to remain full. The industry runs on the individual, his contacts and his foresightedness much more than the organizational clout and outreach that other industries enjoy.

]]> By: Basab Pradhan http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16464 Basab Pradhan Fri, 30 Oct 2009 21:32:53 +0000 http://6ampacific.com/?p=530#comment-16464 I don't contest the point that compensation in capital markets is higher than other industries because the companies gain from having the smartest people working for them. But that still leaves open questions like - - How high is high? Once they have crossed the other industries how high does it have to be for it to be serving the purpose of pulling talented people in. - Why has it grown faster? Comp in capital markets have always been higher. But if in the last two decades it has grown much faster than the average comp (or even avg comp in college educated pop) is that because it absolutely must have the cream of the working population (which I can tell you is not the case at all)? Or is it that the total pie - profits + bonus pool - has been growing like a rocket leaving enough room to satisfy investors and hand out oversize bonuses. I don't contest the point that compensation in capital markets is higher than other industries because the companies gain from having the smartest people working for them. But that still leaves open questions like –

- How high is high? Once they have crossed the other industries how high does it have to be for it to be serving the purpose of pulling talented people in.
- Why has it grown faster? Comp in capital markets have always been higher. But if in the last two decades it has grown much faster than the average comp (or even avg comp in college educated pop) is that because it absolutely must have the cream of the working population (which I can tell you is not the case at all)? Or is it that the total pie – profits + bonus pool – has been growing like a rocket leaving enough room to satisfy investors and hand out oversize bonuses.

]]> By: Krishna http://6ampacific.com/2009/10/29/wall-street-bonuses-are-not-the-real-issue/comment-page-1/#comment-16463 Krishna Fri, 30 Oct 2009 17:52:46 +0000 http://6ampacific.com/?p=530#comment-16463 People's cost are significant in capital markets for a reason. They needed the same people's genius to turn perceptions (of entrepreneurs / investors) into reality. If the Carnegies and the Mellons and the Rockefellers led the early industry opportunities, the Googles and Amazons of today made it in double quick time thanks to the wizards at Wall Street and they certainly don't curse them - and that's pretty much the way it should be. If anything needs fixing, guess it is the regulatory vigil. Every (in)security is filed with SEC for registration before it is issued to public. For a change, why haven't anyone put SEC on the doc for not blowing the whistle, not even once before the whole damn thing blew up ? People's cost are significant in capital markets for a reason. They needed the same people's genius to turn perceptions (of entrepreneurs / investors) into reality. If the Carnegies and the Mellons and the Rockefellers led the early industry opportunities, the Googles and Amazons of today made it in double quick time thanks to the wizards at Wall Street and they certainly don't curse them – and that's pretty much the way it should be. If anything needs fixing, guess it is the regulatory vigil. Every (in)security is filed with SEC for registration before it is issued to public. For a change, why haven't anyone put SEC on the doc for not blowing the whistle, not even once before the whole damn thing blew up ?

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