An Annoying Market Failure

[Hawker]

Nassim Nicholas Taleb predicted the crash in 2008 and has a pretty good record since then.  In his latest article, he points to one of the most bizarre aspects of the banking industry.  Its top management has destroyed shareholder value yet salaries for management have not fallen.  They get paid the same whether they destroy the bank or run it profitably.

http://www.project-syndicate.org/commentary/taleb1/English

Money quote: "A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.

One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all?"

Its the same in the UK where there is no SEC type body so its not a regulatory failure. This is a failure by the owners of the banks to hold the top employees to account.  Its as if the people who manage our pensions and savings are not even bothered that the funds have been devalued. 

So, we are all free market enthusiasts.  In any other market, failure would be punished by being fired with no bonus paid.  Even in banks, a clerk who loses a few dollars in a branch will get fired.  Why is it in the finance industry top management, failure is rewarded?

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[NghtRppr]

Markets don't fail. People fail. If people refuse to make informed rational choices, they'll get poor results.

[JeffK]

Nassim Nicholas Taleb predicted the crash in 2008 and has a pretty good record since then.  In his latest article, he points to one of the most bizarre aspects of the banking industry.  Its top management has destroyed shareholder value yet salaries for management have not fallen.  They get paid the same whether they destroy the bank or run it profitably.

http://www.project-syndicate.org/commentary/taleb1/English

Money quote: "A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.

One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all?"

Its the same in the UK where there is no SEC type body so its not a regulatory failure. This is a failure by the owners of the banks to hold the top employees to account.  Its as if the people who manage our pensions and savings are not even bothered that the funds have been devalued. 

So, we are all free market enthusiasts.  In any other market, failure would be punished by being fired with no bonus paid.  Even in banks, a clerk who loses a few dollars in a branch will get fired.  Why is it in the finance industry top management, failure is rewarded?

Short answer: Markets, like the humans who participate in them, are not always rational.


Sometimes failure is intended, and therefore, for the bankers who fail and get raises, it is actually a job well done.

[JeffK]

Markets don't fail. People fail. If people refuse to make informed rational choices, they'll get poor results.

Markets are people, If people fail, markets fail.


No, your ideology is not pure and perfect, as much as you'd like to think it is.

[Hawker]

Markets don't fail. People fail. If people refuse to make informed rational choices, they'll get poor results.

Investment managers are employed to do just that.  And for centuries they have done just that - capital markets have always been merciless when it comes to punishing failure. 

The puzzle is why they have stopped for 1 industry since 2008. 

[deuxmill]

Because if they don't punish them then everything gets devalued and capital buys more and then the cycle starts all over again.

[AyeYo]

Markets don't fail. People fail. If people refuse to make informed rational choices, they'll get poor results.

And people can absolutely be trusted to consistently make poor, irrational choices, which is why unhindered markets can be trusted to fail consistently.

The puzzle is why they have stopped for 1 industry since 2008.  

It's not really a puzzle.  Shareholders having a voice and effect is a myth.  The executives run these companies in whatever way they see fit and shareholders can't do a damn thing about it.  Dryships is my favorite example of this, as the CEO who is widely hated by shareholders for his stupid decisions and poor choices has actually come out on multiple occasions and straight up told the shareholders to pound sand, he'll do what he wants and if they don't like it then can sell their stock.








Well isn't that interesting...

[becoin]

This is a failure by the owners of the banks to hold the top employees to account.

It is not failure. The top employees in the banks act upon direct instructions of the owners of the banks!

[Boussac]

This is a failure by the owners of the banks to hold the top employees to account.

It is not failure. The top employees in the banks act upon direct instructions of the owners of the banks!

Let's not lose sight of the fact that the banking system is a cartel organised by the central bank.
The share holders of the banks have little control over what top bankers decide: for instance, exceedingly high compensations in the banking industry act as a barrier to entry.
If some brave shareholders of a bank decided to cut the compensation of the top managers, they would leave and be replaced by newcomers.
The peers of those who left would simply not do business with the newcomers and the brave shareholders would get hurt.

[Hawker]

Lets not descend into conspiracy theories.  It is a market failure in that no-one's interest is being served by the existing situation except that of the top employees.  The question is why.  AyeYo may be right that shareholder power is simply not exercised.  But why not?  The investment managers are losing money and their funds are being downgraded yet they still allow the bank managements to get paid bonuses for losing money.  

[becoin]

The share holders of the banks have little control over what top bankers decide:

Wrong! The shareholders have full control. Not all shareholders of course, but the one that are holding the controlling stake. These shareholders simply do not care how profitable are their banks because their profit is in the form of ultra cheap, unlimited, endlessly revolving, and barely guaranteed loans for their firms and related businesses!

[FirstAscent]

Corporations, businesses, etc. can be counted on to do one thing well: ensure the financial prosperity of upper management. Among the strategies to aid in that outcome are: limiting the flow of information, creating propaganda, consuming resources at the expense of our future and taking advantage of disparities between nations.

[NghtRppr]

Markets are people...

[JeffK]

Markets are people...

Cool image bro, it doesn't change the fact that 'markets' and not some magical God-like entity or a hard mathematical equation, they are comprised of people and thus behave as irrationally as people do.

[NghtRppr]

Cool image bro, it doesn't change the fact that 'markets' and not some magical God-like entity or a hard mathematical equation, they are comprised of people and thus behave as irrationally as people do.

That's like saying that a hammer fails if you smash your thumb with it. Hammers don't smash thumbs. People do. It's just a tool and it can be used poorly or wisely. Hammers aren't people either.

[Hawker]

The point is that it is a market failure. The system hasn't worked. 

[MatthewLM]

The financial mess we are in isn't markets failing, it's the failure for us to have free markets. What we have is a fascist system designed to make bankers and other corporate interest groups rich at the expense of everyone else. It's the failure of corporatism and of-course it fails. It's the failure of central planning being used to make the rich richer and poor poorer. Actually it makes everyone poorer. The economy doesn't go anywhere fast. Some people say this is a good thing, that the governments must stop economic progress.

In summary, the economies are corporatist and not free market so don't be surprised.

[NghtRppr]

The system hasn't worked.

A hammer won't work if you hold it wrong. Clearly, hammers are prone to failure.

[becoin]

The point is that it is a market failure.

Nope, it is not a market failure. Markets worked as expected. Government didn't. It is a government failure. Government were too scared to let the market do its job. Government were too scared to let banks fail. Governments in the US, UK and EU simply surrendered to racketeers. Now the taxpayer has to pay for the losses banks incurred by speculating on real estate markets.

[onesalt]

The point is that it is a market failure.

Nope, it is not a market failure. Markets worked as expected. Government didn't. It is a government failure. Government were too scared to let the market do its job. Government were too scared to let banks fail. Governments in the US, UK and EU simply surrendered to racketeers. Now the taxpayer has to pay for the losses banks incurred by speculating on real estate markets.

This could possibly be something to do with bank failure on such a massive scale destroying civilisation as we know it and rushing in another dark age but whatever.