Everyone seems upset by the prospect of banks paying big bonuses. What they’re not asking is: why have banks paid them for so long?
The popular answer is that banks need to attract the best talent.
Yeah, right. Eric Falkenstein and James Kwak provide the real answer. Traders must be bribed not to plunder the firm. If you don’t pay them millions, they’ll sell the banks’ assets cheaply to rival firms for which they then go and work. They are paid fortunes not because they have skill, but because they have power.
Great point. Pushes towards a managerialist theory, of course.
(Hat-tip Zby)
1 comment:
I also wonder to what degree the traders have their own set of 'clients' with large investment accounts. If these clients trust only that particular trader, then if the trader leaves to a rival bank so will the client account with all their money.
In this sense the 'assets' that some traders have power over is the banks' relationships to their highest value investment clients.
Indeed, from this perspective maybe some aspects of the trading floor should best be seen as a partnership between traders with clients, rather than a bank with clients that employs traders.
If a particular trader then does great work for a particular client it kind of makes sense that the client and the bank-as-partnership will want to reward that trader.
However, I don't know the relative size of trades backed with client capital as opposed to trades backed with bank capital, so it's hard to know how important this 'trader as semi-autonomous partner' issue is.
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