[homme]

Instead, you will be stuck with the incompetents who got you into the situation in the first place and are just happy to keep their jobs, multi-million/billion dollar pay cut or not.

Or clearly superior talent like John Thain, et al.

Do you seriously mean to imply that there are no individuals out there making less than 500k per annum who could not pull off a deleveraging and conservative restructuring of a business? No one?

Who are these individuals who will work for no less than several million per annum who have pulled off such miracles that no mere person earning less than half a million per year at the moment clearly outclass?

Certainly they have not been at the helm of any financial institution I am aware of. Hell, I nominate mynameishere for one of the positions, as he seems to have a clearer grasp than most of the idiots at the helm last go-round:

http://news.ycombinator.com/item?id=308425

And he probably is available for 500k/yr.

[bwd]

Deleveraging and conservative restructuring may work for a commercial bank, but not the hybrid commercial and investment banks that we're talking about here. These companies are involved in many diverse business lines and, bungling in the mortgage-backed business aside, many of these businesses are hugely profitable. This is why institutions like Goldman Sachs and Morgan Stanley were able to report large losses instead of collapsing: mortgage losses have been mostly offset by gains in other businesses. A CEO will need to continue to invest in the profitable business lines, with an eye on risk, to avoid being shut out of them by aggressive competitors, leaving the bank with nothing but toxic assets and low margin operations.

In "How to Make Wealth" pg wrote about how salesmen are an exception to compensation rules because their performance can easily be measured. The same is true for traders who do not deal in positions that must be held for a long time the way mortgage bonds are. If a trader makes $30 million in this way, he is in a position to demand, say, $5 million to $10 million or he will be happy to join a different firm that will pay him that amount. Thus, the reduction of compensation at the top levels cannot trickle down to the lower levels without destroying the firm by causing its top performers to leave.

[Retric]

Traders are actually one of the hardest professions to measure. They are risking other peoples money so for example making 50% in an up market at the risk of drooping to 0% in a down one are easy with leverage. It's the choice of when and how much to leverage that takes skill. And this skill is only demonstrated as markets move. This past mess was built from people making a bet with high odds and low payoff with a lot of other peoples money and skimming the fat of the top. Basically, no earthquake today you get 50k until the day when there was an earthquake and they are down 100 billion.

PS: One of the secrets to creating mutual funds is to make 100 of the things with a few million on hand and take lot's of risks. Over time some will preform better, you use their past performance to gather more money and you end up with a small number that have a lot of money and have made the early movers lot's of money but have not necessarily generated a lot of profits for the late adopters. It's like a legal pyramid scheme, but when it stops working they can move you to the next fund with a great track record, and the next, ...

[homme]

Deleveraging and conservative restructuring may work for a commercial bank, but not the hybrid commercial and investment banks that we're talking about here.

AFAIK, Morgan and Goldman are now commercial banks and restructured to this form to stay alive.

http://www.nytimes.com/2008/09/23/business/23wall.html

These companies are involved in many diverse business lines and, bungling in the mortgage-backed business aside, many of these businesses are hugely profitable.

Is this legal since they are now commercial banks? Do you have any citations on these hugely profitable non-core businesses? At any rate, gains from trading desks will be seriously diminished by holding/leverage requirements.

If a trader makes $30 million in this way, he is in a position to demand, say, $5 million to $10 million or he will be happy to join a different firm that will pay him that amount.

Do you have any stats on any member of the trading desks of these firms doing these types of numbers? Further, is it reasonable to assume these traders can continue to be as productive in this leveraging/financial climate? Is the current market for that talent still as strong?

[wheels]

Well, there is this one guy, but he's a bit sick at the moment.

http://en.wikipedia.org/wiki/Steve_Jobs

[homme]

I don't know. Steve has excellent empathic design acumen and taste, but do you think thats whats required to stop making dumb loans and restructure and write off bad debt?

Not saying he couldn't do it, but the skill sets seem orthogonal.

The crux of my argument is the refutation that you need someone of that caliber to do what appears to be pragmatic banking and risk management.

[wheels]

No, I don't. That part was a joke.

I was just using him as a case of someone who could obviously set his own salary working for a whole lot of places and decides to be compensated in other ways (stock, notably). He also went back at the brink of collapse and reanimated the company, so in that aspect it's similar.