More proof that compensation limits do not make sense…

By: ispeculatornew
Date posted: 10.14.2009 (7:34 am) | Write a Comment  (1 Comment)

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citiRemember a few months ago when it was reported that Citigroup trader Andrew Hall was earning a 100$M annual bonus? Many expressed the opinion that it was crazy, an exageration and that no one should be making that amount of money. My view however was that it can be justified. If a trader is able to generate 1 billion dollars of profit and he signed up to get 10% of his profits, isn’t it still a good deal for the bank to pay him his dues? You would certainly think so.

A few had commented that it depended on how much capital he was using. Of course yes. But generally, traders are charged for their use of funds. So if a trader uses up 1 billion $ of capital, he will be paying intterest on that amount that will be deduced from his “trading profits”. Just wanted to clear that point up.

In any case, Barack Obama responded to the outrage about compensation by setting limits on companies that are using public funds. This prompted companies such as Goldman Sachs and Morgan Stanley to pay back the government. Obviously, other companies such as AIG and Citigroup are not able to do that just yet. So in the meantime, they have to find alternatives.

In this case, they had 2 main choices:

andrew-hall1-Get rid of the highly profitable trader to avoid dealing with the issue. The major downside of course is that the major profits generated by Hall will be gonee…

2-Sell the unit where Andrew Hall trades and probably still let the unit manage Citi funds. This way, no “Citi employee” will be making insane bonuses (the employee will no longer be employed by Citi) but also Citi can keep giving the unit big amounts to manage.

Of course, #2 was chosen. So congrats Barack Obama, you got what you wanted. No Citi employee named Andrew Hall will be making 100$M in profits, he will be receiving his check from his new boss, Occidental Petroleum.

So what has changed really?

Nothing in fact, as compensation will be exactly the same, except Citibank will have a little less control over the unit. This is exactly why I think these laws do not really work and they are more for show than anything else. Did the public really want Citi to lose out on 900$M by not inesting through the commodities unit anymore? Really???

What can be done then?

Some would say that the Obama administration should impose limits on all managers, not just ones that are using TARP funds. Again, that is very short sighted. First off, Citi and other banks give billions of dollars to manage outside of the country, No need to say that the US government has no control over what happens in those countries and how compensation is done. And putting too many limits on the US banks would put them at a majorr disadvantage with their foreign competitors…

So what is the solution???

I don’t think it’s that difficult. Explain things to the American public, how the compensation system work, why some managers make so much money, how it compared to other industries, etc, etc. I think the public is smart enough to understand the point. No doubt, it is easier to simply critic and add legislation but in the long term does that really work? My answer is no…

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1 Comment

  1. […] Intelligent Speculator: Proof That Compensation Limits Don’t Make Sense […]

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