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Christmas is Over and Banking is Banking

By The Prince ⋅ January 22, 2008 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

The Prince loves a great debate and there is a great one going on right now over banker pay.  The traditional financial media has been abuzz recently with pieces critical of banker’s pay.  Some of the pieces call for claw-back provisions to be added to bankers’ bonuses.  The financial media is essentially saying that in today’s transactional financial marketplace the employees of investment banks have no incentive to insure that the deals they do or the issuances they structure will perform well in the future.  Now there has already been a flurry of responses to the assault that the financial media has been trying to lay on bankers for the credit crisis and the decline in the value of housing securities and actual homes.  Here are some of the articles critical of banker pay and each offers different solutions to the perceived problem.

Financial Times - "Banker Pay is Deeply Flawed" By Raghuram Rajan  - January 8, 2008

Financial Times - "Regulators Should Intervene in Bankers Pay" By Martin Wolf - January 15, 2008

Wall Street Journal - "Deal Fees Under Fire Amid Mortgage Crisis" - By Liam Pleven and Susanne Craig - January 18, 2008 -  Page 1

Needless to say, many financial blogs have attacked the media’s arguments.  The Prince’s favorite piece responding to the argument that banker pay should be re-incentivized or regulated by the government (the suggestion for government regulation is simply absurd but it has been put in print) comes from the Epicurean Dealmaker.  His response to financial journalists banging the populist drum against banker pay is hysterical and right on point.

The Epicurean DealMaker - "The Pressure Room" - January 17, 2008 - One of his best pieces of work.  He is such a great writer.

The ED’s posts leading responding to The FT up to "The Pressure Room" post:

"Eat the Bankers" - January 9, 2008

"Armageddon Rag" - January 15, 2008

"Armageddon Outta Here" - January 16, 2008

Some responses to the ED by FT Alphaville to add some flames to the fire.

FT Alphaville "The Banker’s Pay Bust Up" - January 17, 2008

FT Alphaville "Some of My Best Friends are Bankers" - January 18, 2008

FT Alphaville "The Last Word on Banker’s Pay (Allegedly)" - January 18, 2008

Two disclaimers before we begin.  First, the Prince must admit that he does have soft spot in his heart for the Epicurean Dealmaker.  Second, there really isn’t anything The Prince could add that would be as good as what the ED just wrote this last week but The Prince is going to try anyway. 

First of all, the financial media needs to learn the difference between investment bankers and the structured products employees who created the instruments that caused this crisis.  The financial media’s ignorance of the basic organization, power structure, and roles of investment banks is truly astounding.  The financial media is essentially complaining about declines in the secondary market for MBS and CDO issuance.  At the end of the day you cannot blame the bankers for the performance of these issues in the secondary market.  Investors bought these securities and when they declined in value everyone got hurt, even the banks that originated the paper.  Investors took the risk, should of performed their own due diligence, and the issuers did nothing illegal when they marketed these securities.  The institutions that bought this paper are big boys and they should take the losses as a result of their normal risk-taking.  To think that the government should regulate banker pay is sheer lunacy.  The financial sector attracts the best and the brightest because it offers merit based awards that dwarf other industries.  I don’t think the government or investors want less qualified people operating in the capital markets or as corporate finance bankers.  If he government regulates pay individuals that would have went into banking will look elsewhere.

Finally, the financial media’s ability to absolutely ignore opportunity cost and the alternatives of many bankers is truly astounding.  They should know better.  When bonus pools rose this year many journalists cried foul.  What they neglected to understand is that outside of mortgages most business units had banner years. M&A and sponsor activity was at a record pace for most of the year.  Banks by raising bonuses are simply responding to market realities which dictate that their best employees are no more than a phone-call away from a new job in private equity, hedge funds, or other banks if they are unsatisfied.  The lucrative alternatives for bankers for investment banks to pay high bonuses to compete to keep talent.  Financial journalists missing this part of the story really show that they have only a rudimentary understanding of basic labor market dynamics.