Stack he won face it is the taxpayer who loses his shirt

Haro on the "golden boys". For policy, the opportunity was too good, and they have not missed it: a tiny minority of young people, affecting exorbitant salaries, have precipitated the global economy into recession. But regulate everything, must be thinking about the economy of the problem to sketch different reform tracks.

With the crisis grew the idea that it was the structure of these wages, more than the amount which was in question. (Too) simply put, a market operator is paid on the basis of the annual profit that it performs. Found only on its end of year revenues, Bank trader becomes an Ultrashort-termiste operator, without regard for the risks he would run his employer. Stack, he won, face, it is the taxpayer who loses his shirt.

The idea is not new, and some safeguards were there to limit the excesses. Internal control risks must measure and limit exposure to the risk of different portfolios. It is also common to measure the performance of the trader not in absolute terms, but relatively to the risks that he took. This is intended to limit the appetite for risk: risky positions are most (on average), but the bar, so that the performance is satisfactory is high.

But these mechanisms did not work. Measure the risk of a portfolio has proved very difficult, especially when dealing with disaster risk. The cost of the risk has been set at a level too low, in an environment where the market itself, disrupted by an exceptionally accommodative monetary policy, sous-évaluait risk premiums. It is true that the growing size of the financial issues made the temptation of more rapid jackpot among traders, and therefore "discipline by reputation" more fragile.

At first glance, the solution is simple: indexing the remuneration of the traders on the profits that they realize in the long term. For example, the operator could receive his bonus only every five years on the basis of the performance of its activity, just as in the "private equity". Unfortunately, this solution is difficult to implement in the halls of market, as the profits of a given activity is a notion that it is difficult to define legally over the long term: the desk can be redefined or closed, the trader positions can be changed in the future without its consent or transferred to another entity. Block the bonuses in shares of the Bank would not solve the deficit of long-term incentives because banks are so large that individual decisions of an individual trader have only a marginal impact. Under these conditions, the economists say that pay contracts are incomplete.

Long-term incentives are much better defined in companies where the individual contributes to a significant fraction of shareholder value. For example, small biotech companies give much stronger incentives in action their researchers that large pharmaceutical companies who renounce set by quantitative measures the value of their scientific discoveries. Hedge funds and private equity funds are to banks, in a situation similar to biotech firms. The Fund is an entity with the legal definition States, it is possible to have a bit manipulable performance measurement of manager and even to make long-term investment in the Fund: contracts are more complete.

Incapable of long-term incentives, big banks therefore undergo a strong disability from investment funds. In these circumstances, must major banking conglomerates continue to invest in own-account trading