The problem of banking arises from governments granting them the right to use our money –the money we deposit in savings and other similar accounts– for risky investing ventures. They trade and speculate with our money. Investment bankers buy and sell securities, whether equity or debt. They also engage in financial engineering. Financial instruments have quite an upside potential, but buyers of these instruments should be aware of behavior characteristics that affect the marketing of these instruments. When markets drop, they are the losers, not bankers. Strict regulation is required to balance this equation. Banking executives playing this game at leisure are immune under the present system where they never risk being on the losing side, while they collect multimillionaire salaries and bonuses. Therefore, they will continue to take exorbitant amounts of risk. And governments keep bailing them out with more of our money.
They make the rules, and get the gold
July 14.─ The crisis has taught people a lot about the banking industry and the thought processes of its leaders. These lessons can be distilled into four golden rules.
1. The laws of supply and demand do not apply. When food producers compete to supply a supermarket, the retailer has the luxury of selecting the lowest bidder. But when it comes to investment banking, wages are very high even though the number of applicants is vastly greater than the number of posts. If the same was true of, say, hospital cleaning, wages would be slashed.
An investment bank, like a supermarket, demands a certain quality standard: it will not hire just anybody. But whereas it may be easy to identify a rotten banana, it is harder to be sure which trainee will be the next Nick Leeson and which the potential George Soros. That gives executives an excuse when things go wrong.
2. Success is down to my genius; failure is caused by someone else. When banks do well, and profits soar, the bosses are responsible for it all with their strategic cunning and inspiring leadership. Huge bonuses are therefore due.
But, like Macavity the mystery cat, executives were never at the scene of the crime. They did not attend the crucial meeting, read the vital memo or open the incriminating e-mail. Together with this surprising inattentiveness, executives have a remarkably faulty memory which means that conversations are rarely recalled in any detail. It is a wonder, indeed, given their technical shortcomings and early-onset Alzheimer’s, that they make it to the top of their organisations at all.
But executives do tend to remember one vital fact. When scandal breaks, the blame should lie with a few rogue employees who have ignored the corporate culture. Managers cannot possibly be expected to keep track of the actions of junior staff. And that leads to the next rule.
3. What is lucky for an individual trader may be unlucky for the bank as a whole. There is a survivorship bias in both fund management and trading. If your career starts with some bad losses, it will quickly come to an end. So, by definition, veteran traders will have had initial success. But that could be down to luck, not skill.
Successful fund managers attract more clients and thus manage more money ...
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