Friday, January 30, 2009

Not Saying It Helps...

This was going to be a comment to Hoy's latest post, but it was getting long... now it's longer.


I guess I should preface this with the fact that I make >50% of my compensation in a year-end bonus. But then, I'm also not being bailed out.

There are a few other considerations to take into account here. I know they'll get no sympathy from anybody, but they are part of the thought process.

As a whole, "banks" these days are made up of different arms. There's the bank you deposit your money with. This same bank also gives you a mortgage, foreign currency, a savings account, a chequing account, and a credit card, among other things.

This is where many small banks end. Savings & Loan stuff. The money is made in the difference between the rates they lend at and the rates they pay. For other services, there are charges and commissions hidden throughout.

Then there's the investment arm of the large banks. Even these are often split into two groups - retail and institutional. The retail side takes Joe blow's money and invests it, either at Joe's discretion or their own if instructed to by Joe. The institutional side trades the money of other corporations, pension plans, BIG time investors, and the bank's own money. For the services of clients, every bank charges a commission of varying rates. When trading the bank's money, profit and loss is where the money is made/lost.

Now within all these arms and groups, things are further divided. Groups as small as a 2 or 3 people, or as large as hundreds, exist who have a specific mandate. Within those groups, individuals have different responsibilities. Some trade, some clear trades, some deal with back office, funding, rates, foreign exchange, etc.. Some write the computer progams, and some fix the computers. Then there are lawyers, accountants, risk managers, compliance officers, and countless other responsibilities.

Not all of them lost money.

Some groups actually THRIVED in the crash, and are still making money in this climate. Others are status quo. In some groups, 90% of the people made money, and 10% lost a ton. Sometimes the percentages were reversed. In that latter case, those groups tend not exist anymore.

So, say you're one of the guys who made a killing in the last 3-4 months of the year. The market tanked, but you were short positions. Or you were fully hedged and left unscathed. Do you deserve to have your bonus cut by 80%? No, you outperformed the market in a time when everyone else burned. Don't you deserve to make MORE than the previous year if you contributed more?

Sure, it's easy to say, "Bank X lost $80 billion! How can anybody deserve a bonus?" Well, what if a group MADE $1 billion more than last year? Shouldn't they be rewarded?

Or what if a group lost money, but one of the guys in there had a career year? He made more for the firm than he ever has, but the rest of the group tanked. Bonuses would be slashed for the group, but does he deserve to have his cut by 80% just like everyone else around him? What message does that send? "You kicked ass... and we still won't pay you." He's gone in an instant.

Now, to be fair, this is an industry where increases in bonuses was expected year after year regardless of personal performance. It was just they way it had been going for a decade or more. I shocked my boss one year. He said, "Well, it's been a tough year... so bonuses won't be as high as last year." I responded with, "Isn't that why they're called bonuses?" He was speechless that somone actually thought that way... that a bonus was actually a reward for doing a good job.

The mentality in Canada for this industry is to expect the worst in a down year, and expect to be disappointed in an up year. Then, if the worst doesn't happen and you aren't disappointed, it's a good thing. Plus, we make a fraction of what our US counterparts do.

But from what I've been led to understand, it's not quite the same in the States. Wall Street is where the big swinging dicks are, and they'll be damned if they aren't worth every penny they're paid. It's easy to justify when you're making money hand over fist for the firm, but when you lose money and bitch that your bonus was docked? I laugh, and then shake my head that people can be that self-deluded.

Anyway, the point to all this is that ANY across-the-board cuts are unfair. CDS groups should be largely liquidated, the money-losers should have big bonus cuts, but the few that actually made money? They should be rewarded proportionally. In the end, I imagine this largely happened in the lower levels. Those who lost money either got proportionately small bonuses or none at all, while those who outperformed saw an increase. Once you get to management and executive levels though, I have no idea how bonus is figured out. It's generally assumed that a random number generator is involved, and the result is multiplied by a million.

All in all, I'd guess we'd see upper-level bonuses cut 40-70% (which means only millions instead of tens or hundreds of millions), and the lower levels balance out at around 50%, with some getting cut drastically, and others seeing an increase.

Obviously, any arguments about the cost of living in a Central Park apartment and drinking $30 martinis are pointless and stupid.

After all, if anybody made money, wouldn't want to make sure they didn't jump ship? It's easy to look like a genius in a bull market, and the past 10 years or so have had the most bull ever.

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