Thursday, February 28, 2013

Bankers getting a larger piece of the pie

This article shows data about banker compensation increases over the last 25 years.  Interesting that the article is in Bloomberg whose largest customer segment must be bankers.  No doubt in my mind that capital-reallocators have secured a larger piece of the pie.  The author shows the trend and despite the title does not delve in to why it has happened.  So I will.

Bloomberg: the-reason-wall-street-got-so-rich-in-two-charts

Bankers have been able to extract increasing compensation by:
- combining commercial and investment banking activities which was enabled by the repeal of Glass-Steagall in 1999.
- putting less of their own and getting more of investors money to put at risk.  The decline of the partnership ownership structure being replaced by shareholders
- changes to political campaign finance rules that have allowed individuals and corporations to give more and more to specific candidates
- more bankers entering government and more government officials leaving for banking positions
- more and more friends of the CEO on the board of directors 

Greg Smith who famously publicly resigned from Goldman Sachs last year because he was discouraged by how the firm kept misleading its clients gave an interesting talk at Stanford recently.  The video is here:
Greg Smith former Goldman Sachs Director presentation at Stanford

He did a nice job summarizing how an effective system cannot be regulated with fines, taxes, and the threat of jail time.  The system must be structured so that unfair practices are not possible.  Commercial banking should be separated from investment banking and not just by a 'Chinese' wall.  Traders should have more of their own capital at risk.  High frequency trading should be stopped with a procedural change such as a 30 second rule.  

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