Yes, bankers made money despite the crash
One of the louder arguments started by the financial crisis has been whether banker pay was a direct contributor to the crash. On the one hand, well, of course it was. Outsized risks generated outsized returns, and everyone loves outsized returns. On the other hand, of course it wasn't. These guys all had tons of stock in their companies and suffered huge losses in the crash. They might have taken bad risks, but they didn't have an incentive to do so.
In a new study, Lucian Bebchuk, Alma Cohen and Holger Spamann settle the empirical question of this debate: The bankers made more than they lost. Quite a bit more, in fact. Holdings get cashed out continually, if not entirely. What bankers made before the crash was a lot larger than the stock they held at the time of the crash. In the case of the top five earners at the top two banks, the difference was as much as $600 million. "Repeatedly cashing in large amounts of performance-based compensation based on short-term results," conclude the authors, "did provide perverse incentives ... to improve short-term results even at the cost of an excessive rise in the risk of large losses at some (uncertain) point in the future."
I think people get a bit off-track fetishizing banker pay, however. Even if the study had found that bankers roughly broke even between 2000 and 2009, it wouldn't be evidence that the trades were irrational. After all, most of the traders who went bust in the crash still have their jobs now that Wall Street is bouncing back. Their expected lifetime earnings aren't very different.
But if any of these guys had held back between 2003 and 2007, if their quarterly returns had been low year after year and they brushed off their angry bosses by arguing that this seemed sort of like a bubble, they would have been fired. Looking at the immediate financial incentives of bankers is a lot weaker than looking at the career incentives of bankers. As Keynes put it, "A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way with his fellows, so that no-one can really blame him."
Photo credit: Richard Drew/AP.
December 10, 2009; 11:09 AM ET
Categories: Financial Crisis
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