Traders/Finance professionals: Maximize my bonus & screw the company?

Great Debates
1

If there are any Dopers who have worked as traders for big firms or in other financial positions (and from posts here in GD, it seems that we have a few), can you guys tell us how pervasive the idea was among your colleagues that “I’ll take actions to maximize my bonuses in the next couple of years, bringing in millions for myself, and I don’t care if my actions will lead the company down a path that will destroy it in the long run”.

For example, do the traders at Lehman Brothers and Merril Lynch, who made millions and millions when times were good, care that their companies have collapsed? (Assuming they stored their money somewhere other than their company’s stocks)

2

That question really is too vague for an answer.

What do you mean by a ‘trader’? Do you think there are hundreds of people sitting around in smoke filled rooms devising plans to scam the average person? This isn’t Enron. There isn’t any actual fraud going on here.

Think of it like this, GM didn’t scam you when you bought a Hummer when gas was 1.25 per gallon. GM didn’t have a master plan to sell Hummers, then jack up the price of gas, then cause the Hummers to become worthless. Once the Hummers became worthless, then GM would be worthless and somehow they’d all end up rich.

3

First, please stop using strawmen such as “people sitting around in smoke filled rooms”

Second, I’m not referring to fraud. I’m referring to thoughts like:

  • Person A: Let’s sell subprime-mortgage-backed securities
  • Person B: In the long run, this will come back and bite our company in the ass. This is not a prudent direction for the company (though it is legal)
  • Person A: Yeah, but we will make millions by the time the company collapses, so who cares?

Of course the above is an over-simplification, and also, the above could be thoughts inside one person’s head (i.e. these things were not necessarily discussed, and even if they were, they were most likely discussed in a far less obvious manner)

So, having said that, did any such thoughts/discussions occur? Or was everyone convinced that the actions they took were good for both themselves and for the company’s long-term health?

4

That’s why I gave you the Hummer example. Hummers are hard to sell in the wake of $4.00 gas. But, I don’t think GM planned to jack up the price of gas to make it harder to resell Hummers.

I don’t think anyone at any firm who designed the very complicated structured mortage products did it on purpose to make sure they failed and didn’t have liquidity.
Now, did anyone think they may have had liquidity problems later? Maybe. But, how many times is the minority opinion ignored in even the most trivial company meeting?

5

I don’t see how this is related to my question. GM does not control the price of gas & the sale of Hummers did not cause the price of gas to increase.

Did I ever claim that anyone did it “on purpose to make sure they failed”?

You are not answering the question in the OP.

BTW, have you worked in a big financial firm?

6

Yes, I’ve worked for a major financial firm. I hold a series 4/7/24/63 licenses.

Let me give you the simple answer:

NO! No one sits around and says, “Well, this will bankrupt the company, but let’s do it anyway because we’ll collect millions in the meantime.”

7

Your question seems to be “do these big companies structure executive compensation so that the workers have long-term incentives”. From what I know, most large publicly held companies do. You can have a look at the executive compensation policy in the annual report to ascertain this.

8

Well I stated that my boyfriend is an md at ML (ergo, he’s very high up). Yes, he cares, and he feels like crap that they got sold. A lot of people have been pissed at Stan O’Neal since the beginning of the year. It’s been interesting to see everyone’s views on it. Not that I think merrill is checking the sdmb for anything but obviously he’s in a high state of distress right now (btw, they’ve all kept their jobs to date) so I don’t want to repeat what I’m getting as the inside scoop because I’m not sure how cognizant he is of what he should/shouldn’t be talking about right now.

FWIW, at least where it concerns Merill, Scylla’s post on the stock market thread was the most accurate.

You’re assuming everyone at these firms was working in mortgage backed securities or had all this control over them when it’s just one area. My boyfriend actually covers another sector altogether.

As far as I am concerned, I work for another federal agency nicely involved in this gigantic clusterfuck and no I didn’t laugh all the way to the bank. I get paid a mediocre wage and attached my legal opinion that “this wasn’t a good idea guys” to every transaction I closed over the last three years.

9

I cannot provide a cite, this is friend of a friend stuff, but the general psychology at some of the failed firms was one of surprise at the way things failed. Especially for the newer employees that hadn’t experienced a downturn or major problems in the markets before. Generally, just like the rest of America, the employees of these firms lived slightly beyond their means and assumed that they would be able to pull their early 2007 incomes indefinitely. Most structured their personal lives around this assumption.

The lucky/smarter ones invested personal money in real-estate in Manhattan to live in (which still hasn’t been hit that hard by the real estate downturn), but the less lucky/intelligent ones have limited amounts of personal assets which can be easily liquidated. Sure, they might still be worth lots of millions of dollars, but they also might still need to sell their home to continue to be solvent, and they will have to make a significant compromise in some aspect of their lifestyle. Very few said, “okay, that’s way more money than I need to live, I’m putting half of my income next year into T-bills in an IRA!” Not renting a nice apartment or living in a particular fashion could be interpreted as a lack of faith in the firm or their career track. When you want to advance and make even more money, you don’t want to look like you’ve got a parachute strapped on standing next to the open door ready to jump out at any moment.

Look at the CEO of Bear Stearns. IIRC, he was essentially a billionaire on paper at one point, but there are limits to how much liquidity your portfolio really has when most of it is the company you head and people wouldn’t really appreciate it if you didn’t seem fully committed to the company. Now I think his personal assets are within the ~$50M range. He probably won’t ever have to sleep on the streets, but he’s certainly not unimaginably wealthy anymore and I hear he’s been personally distraught over the break up of the firm he used to head.

10

To become a trader you usually start off as a runner then a blotter keeper and then various stages of trader’s assistant, than assistant trader, than junior trader , and then finally you’re entrusted with capitol. It’s very competitive. It takes years. You have to learn all kinds of specialized knowledge.

When you reach that level you have skills, a vocabulary, and a specialized knowledge that very few others can even begin to comprehend.

You might call another trader who you’ve never met, at another firm and say “Nick, I’m long 50 UTX 5s of 18 at 120 bips. You want?”

Translation: “I personally own $50,000,000 face value of United Technology Bonds paying 5% and maturing in 2018. I will sell them to you at the same rate a representative treasury is paying plus 1.2%”

“Can I have them firm?” He might say.

Translation: “Will you exclusively offer them to me at that price for 1/2 an hour, and promise not to snake me or better deal me or shop them elsewhere in the meantime.” If you have done business and have a relationship that is good he might not feel compelled to ask this.

“Your firm.” You might reply.

Ten minutes later he might call you and say “I’m at 125 on the UTXs.”

You say, “You’re done.”

You scribble in a blotter and pass that to your assistant, and hang up the phone. You are probably on two other calls while this is going on.

You’ve just negotiated a $50,000,000 transaction. A few minutes later an assistant puts a ticket under your nose and you scribble an initial on it.

There are lots of things going on here, but the biggest one is trust. You and Nick are trusting each other in all kinds of huge ways beyond what is obvious. The transaction is just a piece of it, and probably the least important of it. You are trusting each other with valuable information.

Nick knows that I have a source for this issue. He could go after that source and cut me out. When Nick asked if he could have the bonds firm, he was trusting that I wasn’t just fishing a rumor to see if we was looking for those bonds. He was trusting that I wasn’t going to use that info to try to find the buyer myself and snake him. Both of us have salesmen begging and pleading for such information. They will buy you Rolex watches, ridiculous gifts, seek to entertain you on weekends, or otherwise offer their soul just on the off chance that it will dispose you to look on them kindly at some point in the future and tell them something like this.

Nick can intuit that you have a salesman who has an insurance Company or other large institution as a client that is currently liquidating a large position. You are trusting that he’s not going to call around your desk and try and find out if you have more of the same issue, or more like issues. From that he could he could intuit whether there is something wrong with United Technologies or something with the issue. He could go for a replacement issue from your seller, or try to poach the inventory before it gets to you.

The possibilities go on and on.

These and other things do sometimes occur. Traders that do them tend to do very well for a very short while, and then nobody will do business with them. It is more valuable for you to have a working relationship though, so you don’t do these things, and you trust Nick not to, as well.

Nick will probably call you back and ask “What are you in touch with?” which translates as “See, I didn’t snake you. I’m not going to snake you. I’m interested in what you have going on and would like to do more business. I would like to look at your inventory for potential trades without fucking you over in any of a million ways that I could if you share this with me.”

Etc. Etc.

What you do, is you speak very precisely and very carefully because every word you make has far reaching implications and everything you say is a promise, and your ability to business is based on your record of keeping your promises and protecting the interests of those who are willing to do business with you.

It’s very cutthroat, but it is very high integrity.

You are very protective of your reputation, the reputation of your desk and the reputation of your firm. If somebody from another firm who you trust and do business with calls you and tells you that he got snaked by somebody at your firm then all business stops, while you listen to this story. If this story holds water, you tell it to everybody on your desk and all business stops while you relate it. Then you correct it. It might be a simple misunderstanding or something worse. I’ve seen fistfights and firings over such incidents. I saw a bunch of guys go down to the parking garage and flip over a Mercedes Benz that belonged to a trader who fucked over somebody we all did business with, after the guy fixed came clean and fixed it. You simply will not tolerate somebody on your desk fucking over the people you do business with. You won’t tolerate them fucking over anybody because it reflects on your reputation and directly on your livelihood. More importantly, you are proud of what you do, your integrity, your firm, and the reputation of all those things.

With mortgage backed securities we were trying to solve a systemic problem that would unlock vast sums of capitol, and make us rich. We knew that the solving of the problem would mean accessible financing, and a housing and economic boom in a depressed environment. Such an enterprise was considered both noble and heroic. People who had made the smallest innovations, the tiniest steps forward in solving this problem were heroes and living legends.

So, no. We didn’t think they way you are suggesting. We all wanted big bonuses and we all thought they should be bigger, but at least in my day, they weren’t all that big for us traders, especially bond traders. The heyday of the 80s was passed. Things were depressed and we were trying to fix them and rebuild after the tremendous damage that had been done by DBL a few years before. The solution to that problem took 20 years before it got magnified and distorted to such a degree that it became its own problem. DBL did a lot of good things before their solution got out of control. I have no doubt that the solutions being devised to today’s problems will become problems themselves decades from now.

That is the nature of the cyclicality of markets and the exploitation of inefficiencies.

Nobody wants to screw their company or the markets to make a fast buck. You plan on being there for a long time, and you want things to be good for a long time. If you are stupid enough to try to exploit things for short term gains you are not likely to rise to a position where you have the opportunity to do significant damage.

Traders as a group feel very proprietary and protective of what they do.

11

Scylla, I hadn’t realized that you had been in the finance industry prior to this recent crisis. I just wanted to thank you for your posts. They’ve been both exceptionally insightful and interesting and have offered a fairly unique perspective. Consider an “Ask the former…” at some point.

12

I have personally seen on a commodities floor traders try to skirt the company risk control policy. Now, this was all small time stuff, nothing that could bring a company down. In every case, the trader was not making a gain for himself at the expense of the company, he just thought he knew more than the eggheads in risk control. He assumed he would be right, and the company would win. Most times, they were right, but a lot of these guys don’t understand risk all that well, and the small but devastating chance of catastrophe. After all, you can usually not wear a seatbelt.

So, I never saw anything done to screw the company, it was more like a police movie where the captain tells Bruce Willis not to do something risky, but Bruce does it anyway, it works out, and the captain says, “I don’t agree with your style, but you’re one hell of a cop”. Usually the risk desk just said don’t do it again.

I’m just sharing a story; I don’t believe my story is a model for the world financial system, etc.

13

That was very interesting Scylla. Thank you for the insight.

14

That bit about integrity is no joke. The Federal government trusts people just like them to keep to their word of multi-billion dollar verbal “transactions” just on their say-so. The Fed calls them up, makes an offer to buy or sell some bond issue, and expets an answer within 30 seconds, over the phone, done deal. And it’s ironclad.

Frankly, that’s a profession I don’t think you could pay me enough to take. Or maybe if you paid me in Tums, it might just barely relieve the stress.

15

It took me a couple of minutes to figure out what DBL was, then I realized it was Drexel Burnham Lambert, in case anyone else didn’t get the reference.

Thank you, Scylla, for a VERY interesting post!

16

Scylla Just wanted to get your insight on how you and yours view the politicians call for regulation of your industry.
Do you guys view it as “probably necessary and had been necessary for some time” or more of “a knee jerk reaction by politicians to make it look like they’re doing something, they haven’t a clue, it’s cyclical and will work itself out.” Or somewhere inbetween?

17

The politicians’ calls for regulation are knee-jerk, ill-informed and counterproductive. We do not have to regulate against the disaster that just occured. It is unlikely to occur again. Regulation in this regard will likely be counterproductive.

Now less I be characterized as a free-market fanatic, allow me to clarify. Good regulation is essential. Poor regulation is disastrous. The markets cannot function without regulation. It’s beneficial to all. On their own, it has been demonstrated conclusively that markets do not necessarily seek out the most efficient solutions. In fact, they tend to find equilibrium in extremely counterproductive circumstances as often as they do in productive ones. Rarely do they find the most efficient solutions without the guidance of regulation.

Generally speaking, regulation made after a disaster by politicians who want to appear to be doing something tends to be poor regulation.

18

Been in finance for 20 years. Started on a trading desk in Hong Kong handling JGBs and emerging market bonds; entire department blew up with the Asian financial crisis. I didn’t like the trading desk all that much, and ended up in research management, so I can’t tell you much about the current crisis from a traders’ perspective.

I can tell you a few things tho:

  • no one in any level or function in finance would jeopardize their jobs or their firm for this year’s bonus. No way. Do people want to make money? You bet. But they want to make the big bucks - year after year - and risking 10 or more years of bonuses on one big year is stupid, and everyone knows it.

Secondly - people in finance (I am no exception) tend to love what they do. It’s exciting, it’s challenging, yes it can be stressful, but it can also be rewarding. The strategies that were put in place that eventually caused the subprime problem? It’s not like they wouldn’t have evolved if bonuses had been smaller. Those strategies - it’s what they do. The money is good, it does motivate people to -enter- finance, or maybe to change jobs, etc. But once you’re in and working, you work. Day to day, you’re motivated less by the thought of the bonus down the road than you are by job itself and the stimulus you get from working with some really smart people (although lord knows there are exceptions…).

Third - I’ve been a manager for over 10 years, and seen a lot of changes in the legal and regulatory landscape. My thoughts: First, Scylla’s take on the politicians as being prone to knee-jerk, ill-informed and counterproductive action is being far, far too kind. It’s been the modus operandi for years, and has done nothing but give the government wonks a soundbite to make it seem like they’re doing something to justify their waste-of-space existence.

Internal risk control is slightly more difficult. There are some clear-cut risk control guidelines - no one breaches those if they value their job. But modern-day finance is extremely complex, and fast-changing. It is simply impossible to come up with rules or guidelines that could handle every single transaction, situation, or condition, and the result is a lot of grey area. I’ve worked with some excellent risk-control managers - the ones that worked with the people on the front lines to help them do their job and still keep the firm on the right side of the legal/risk management divide. And I’ve worked with horrible risk managers - the ones that take delight in stonewalling corporate finance managers or traders, not because of any risk issues but because they resented the larger paychecks traders got, or they didn’t like their ‘swashbuckling’ style. Others were petty, small-minded blow-hard paper-pushers who felt they had to disagree with any and all proposals that came across their desk to justify their jobs. The bad ones saw the CF managers and traders as the enemy - the good ones understood that we were all on the same team.

And finally, no more truer words have ever been spoken than by Scylla’s quote below: