[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?