5 ms·

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front o

by osrec 6y ago

As someone who has worked in the Investment Banking industry for a while, I'm always amazed that risk professionals get paid significantly less than the front office guys. This in turn attracts less talented people in risk, who can then be outsmarted by the whipper snappers in the front office teams. If IBs don't want to lose bucket loads of money every so often, pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks.

itsoktocry 6y ago
>pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks. Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking. Because, you're right, if they cared they could solve issues like this tomorrow.
- ethbr0 6y ago
  I think it can be chalked up to cost center vs profit center. Staffing trading makes money. Staffing risk costs money. It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.
- SkyMarshal 6y ago
  They do care about the risks they’re taking and invest a lot of money into risk management. But the real risk management is in buying politicians with campaign donations, lobbying, and revolving door jobs after they leave office. Favorable regulations, weak punishments, and bailouts are much more effective. Bank risk departments are just risk theater.
- vmception 6y ago
  Exactly, I always like to remind myself of the New York State court cases that reaffirmed Compliance Officers are at-will employees, and can be fired for any reason, like raising compliance issues. Some people are regulatory hires.
rwmj 6y ago
Has anyone senior working at Credit Suisse lost any money here? There's your answer. (Perhaps in hypothecated future gains in share options - but even there, maybe not.)
- bidirectional 6y ago
  Yes, of course they have. How does a company losing a sum equal to nearly 2 years of profit not have the most dramatic impact on senior officials at said company? Where do you think the executive bonuses and value of shares (not just options, senior officials will already be vested) come from? Beyond those losses, the head of investment banking and the head of risk were both fired yesterday. The real problem is lower down the ranks, where someone on the trading floor can take outsized risk to boost their potential bonus, where worst case scenario they're fired without much ceremony and get another job somewhere else.
  - Spinnaker_ 6y ago
    It's called the Bob Rubin trade. For years you stack up risk and profit immensely from it ($125 million). When things eventually blow up you simply... step away. So sure, people were fired, but it's not like they are giving back all the money they made.
    - whatshisface 6y ago
      Principal-Agent problem, we meet again.
- osrec 6y ago
  Lara Warner (Chief Risk Officer), was fired today, so I guess she's lost a fair bit.
  - deleted 6y ago
    [deleted]
  - rwmj 6y ago
saucoidev 6y ago
I agree but i this is still playing the same game, and it's the rules that need changing There is a system set up which incentivizes your employees to screw over their own company, by taking more risk than they should, frontrunning their own clients, etc. And it necessitates setting up your own internal police (compliance, risk) just to make sure they don't get too out of hand. There are personal incentives there for the IB people to try to outsmart and get something past risk, or avoid getting caught by compliance, not to try to do what's best for the company or their client
- mason55 6y ago
  > and it's the rules that need changing Why? The shareholders & execs were free to impose stricter compliance and risk rules. They chose not to. As long as you don't have contagion spreading to the rest of the financial system then who cares. The new rules put into place re: bank capitalization after the GFC seem to have worked here. Shareholders & execs are taking the hit, the rest of the banking system doesn't seem to be affected, and everything seems to have worked as it's supposed to in this case.
  - clairity 6y ago
    the reporting on stress testing (that i've seen, at least) implies that added rules like further limiting bank capitalization fall woefully short of preventing another contagion from spreading. i'm down for letting banks rise and fall on their own merits, but we've not had that since before the 80's at least.
    - dcolkitt 6y ago
      We just went through the deepest, fastest recession since the 19th century. And not a single major financial institution failed or even needed a bailout. That's pretty firm evidence that banks are more than adequately capitalized. People want to see everything through the lens of 2008, but the difference between banks then and now is night and day.
      - 6y ago
noisy_boy 6y ago
The entire model is balancing risk and reward. Being careful means you'll be eaten by your competitors, your shareholders will punish you and executive comp will take a hit - what is the point of playing the game then? Instead reward taking risks and if shit hits the fan, there are always heads that can roll (if need be), fines that can be negotiated with DOJ/SEC and ever-sneakier tactics can be invented to structure even more clever deals - it is all just normal part of doing business. The two execs that got fired would have been handsomely rewarded if Bill Hwang's bet went the right way, irrespective of the recklessness.
- osrec 6y ago
  Yeah, but the "measure of recklessness" needs to go beyond just value at risk and portfolio sensitivities. Those things can be gamed by clever people and risk can be easily hidden. Unfortunately, most risk managers I knew barely understood the theory enough to identify the hidden risks in the books they oversaw. Most even struggled to get the right data out of the systems to do their jobs properly! You do make a valid point - if the recklessness somehow pays off, you're a hero (eg. Paulson).
xyst 6y ago
dont worry - the us will bail them out like we did in 2008 when they directly caused the housing market crash. it's priced in at this point. there is no such thing as accountability in the finance industry anymore. Make bad decisions, get bailed out. All of them are moral hazards.
- minikites 6y ago
  Not bailing them out would be ruinous for the economy, which therefore means they must be heavily regulated. This half-implemented system of privatized gains and socialized losses is not sustainable.
  - SkyMarshal 6y ago
    There are other alternatives between allowing the economy to collapse and bailing out Wall Street. One proposed by a Harvard Professor during the GFC was to create an Economic Development Bank of the US, seed it with the TARP money instead ($700B), and give it the mandate of financing productive growth activities (as opposed to asset speculation or consumption). The money multiplier effect implies that $700B could multiply into $7T worth of liquidity injection into productive growth activities. Another similar model is the Japanese post-WWII industrial development model, where a central bank or Ministry of Finance finances local regional banks as they support rebuilding and industrialization of their local economy. Google the economist Richard Werner for more on this model. All this can be done while letting big Wall St. banks fail and taking them into receivership similar to the S&L crisis. There is precedent for all of this, it’s nothing new. And certainly more options than Wall St. self-servingly presents.

by osrec 6y ago

itsoktocry 6y ago

>pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks. Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking. Because, you're right, if they cared they could solve issues like this tomorrow.

ethbr0 6y ago
I think it can be chalked up to cost center vs profit center. Staffing trading makes money. Staffing risk costs money. It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.
SkyMarshal 6y ago
They do care about the risks they’re taking and invest a lot of money into risk management. But the real risk management is in buying politicians with campaign donations, lobbying, and revolving door jobs after they leave office. Favorable regulations, weak punishments, and bailouts are much more effective. Bank risk departments are just risk theater.
vmception 6y ago
Exactly, I always like to remind myself of the New York State court cases that reaffirmed Compliance Officers are at-will employees, and can be fired for any reason, like raising compliance issues. Some people are regulatory hires.

rwmj 6y ago

Has anyone senior working at Credit Suisse lost any money here? There's your answer. (Perhaps in hypothecated future gains in share options - but even there, maybe not.)

bidirectional 6y ago
Yes, of course they have. How does a company losing a sum equal to nearly 2 years of profit not have the most dramatic impact on senior officials at said company? Where do you think the executive bonuses and value of shares (not just options, senior officials will already be vested) come from? Beyond those losses, the head of investment banking and the head of risk were both fired yesterday. The real problem is lower down the ranks, where someone on the trading floor can take outsized risk to boost their potential bonus, where worst case scenario they're fired without much ceremony and get another job somewhere else.
- Spinnaker_ 6y ago
  It's called the Bob Rubin trade. For years you stack up risk and profit immensely from it ($125 million). When things eventually blow up you simply... step away. So sure, people were fired, but it's not like they are giving back all the money they made.
  - whatshisface 6y ago
    Principal-Agent problem, we meet again.
osrec 6y ago
Lara Warner (Chief Risk Officer), was fired today, so I guess she's lost a fair bit.
- deleted 6y ago
  [deleted]
- rwmj 6y ago

saucoidev 6y ago

I agree but i this is still playing the same game, and it's the rules that need changing There is a system set up which incentivizes your employees to screw over their own company, by taking more risk than they should, frontrunning their own clients, etc. And it necessitates setting up your own internal police (compliance, risk) just to make sure they don't get too out of hand. There are personal incentives there for the IB people to try to outsmart and get something past risk, or avoid getting caught by compliance, not to try to do what's best for the company or their client

mason55 6y ago
> and it's the rules that need changing Why? The shareholders & execs were free to impose stricter compliance and risk rules. They chose not to. As long as you don't have contagion spreading to the rest of the financial system then who cares. The new rules put into place re: bank capitalization after the GFC seem to have worked here. Shareholders & execs are taking the hit, the rest of the banking system doesn't seem to be affected, and everything seems to have worked as it's supposed to in this case.
- clairity 6y ago
  the reporting on stress testing (that i've seen, at least) implies that added rules like further limiting bank capitalization fall woefully short of preventing another contagion from spreading. i'm down for letting banks rise and fall on their own merits, but we've not had that since before the 80's at least.
  - dcolkitt 6y ago
    We just went through the deepest, fastest recession since the 19th century. And not a single major financial institution failed or even needed a bailout. That's pretty firm evidence that banks are more than adequately capitalized. People want to see everything through the lens of 2008, but the difference between banks then and now is night and day.
    - 6y ago

noisy_boy 6y ago

The entire model is balancing risk and reward. Being careful means you'll be eaten by your competitors, your shareholders will punish you and executive comp will take a hit - what is the point of playing the game then? Instead reward taking risks and if shit hits the fan, there are always heads that can roll (if need be), fines that can be negotiated with DOJ/SEC and ever-sneakier tactics can be invented to structure even more clever deals - it is all just normal part of doing business. The two execs that got fired would have been handsomely rewarded if Bill Hwang's bet went the right way, irrespective of the recklessness.

osrec 6y ago
Yeah, but the "measure of recklessness" needs to go beyond just value at risk and portfolio sensitivities. Those things can be gamed by clever people and risk can be easily hidden. Unfortunately, most risk managers I knew barely understood the theory enough to identify the hidden risks in the books they oversaw. Most even struggled to get the right data out of the systems to do their jobs properly! You do make a valid point - if the recklessness somehow pays off, you're a hero (eg. Paulson).

xyst 6y ago

dont worry - the us will bail them out like we did in 2008 when they directly caused the housing market crash. it's priced in at this point. there is no such thing as accountability in the finance industry anymore. Make bad decisions, get bailed out. All of them are moral hazards.

minikites 6y ago
Not bailing them out would be ruinous for the economy, which therefore means they must be heavily regulated. This half-implemented system of privatized gains and socialized losses is not sustainable.
- SkyMarshal 6y ago
  There are other alternatives between allowing the economy to collapse and bailing out Wall Street. One proposed by a Harvard Professor during the GFC was to create an Economic Development Bank of the US, seed it with the TARP money instead ($700B), and give it the mandate of financing productive growth activities (as opposed to asset speculation or consumption). The money multiplier effect implies that $700B could multiply into $7T worth of liquidity injection into productive growth activities. Another similar model is the Japanese post-WWII industrial development model, where a central bank or Ministry of Finance finances local regional banks as they support rebuilding and industrialization of their local economy. Google the economist Richard Werner for more on this model. All this can be done while letting big Wall St. banks fail and taking them into receivership similar to the S&L crisis. There is precedent for all of this, it’s nothing new. And certainly more options than Wall St. self-servingly presents.