“YOU DO THAT VOODOO THAT YOU DO SO WELL…”

1/15/10

When the subject of megabanks’, many of whom would no longer be extant without government help, paying astronomical bonuses to their employees, arises (Just this morning, CNBC reported that Wall Street pay this year (i.e., paid in 2010 ostensibly for 2009 performance) would be the highest in history.), those who defend Wall Street’s pay practices argue that, without these pay packages, Wall Street would lost its “talent.” Those on the other side of the argument counter with something like “Where are these people going to go to make the kind of money they make on Wall Street?” To which the defenders of these pay packages respond “Hedge funds.”

I find this very interesting. I would like very much for these people in big banks, investment or commercial, who are very confident that they are worth what they are being paid to go to work at hedge funds. As those of you who have been reading this blog carefully over the years know, while I spend a great deal of time criticizing large banks who champion the free market system and rugged individualism while using their carefully cultivated contacts in the upper reaches of our government leviathan to grab a grossly disproportionate share of federal largesse, I have very few problems with hedge funds. Hedge funds are the ultimate free market, capitalist experiment, at least as applied to the financial industry. If one runs a hedge fund and does very well for his or her investors, he or she does very well for himself. If one runs a hedge fund and does poorly for one’s investors, one can make a very nice living for a very short while but will soon be forced to close up shop unless one if fortunate enough to tap a large group of extraordinarily clueless investors, a la Bernie Madoff. At a hedge fund, one’s pay depends on one’s performance. So I say let all these hotshots at big banks who feel they are underpaid when they only break into the low seven figures defect to hedge funds or, better yet, start their own hedge funds. Let them find out how easy it is to make the big bucks when you don’t have a big name, and lots of capital, behind you. Let them find out that the payday at which they sniff is not at all guaranteed but actually depends on doing a good job for the people who have entrusted you with their money.

Doubtless, many, or at least some, of these Wall Street traders will do well at hedge funds, and good for them if they do. But many, and I suspect, most, will fail miserably and go back to their former cushy jobs at hyper-insulated financial behemoths, tails between their legs, and beg for their old jobs back. Just as surely, they will complain when the next round of bonuses is determined and they have to settle for another Porsche or two rather than the Ferraris on which they had counted, but that is how these popinjays operate. A massive defection to hedge funds will show who is really worth his or her salt or who isn’t. And note also that hedge funds have no openings for the McKinsey addled management types who have run these financial institutions into the ground and who seemingly are incapable of running a two car funeral without plenty of government help in the form of either direct aid or cheap money.

Some might argue that allowing such traders to defect to hedge funds will leave the banks with the detritus, with the incompetent non-performers incapable of making a living without the security blanket of employment at a large institution, the dolts who have their jobs because they had the good fortune of their fathers’ being born before they were (who in turn had the good fortune of their fathers’ being born before they were) and a fourth name which is a number. This is true as far as traders are concerned; the best will go to hedge funds. But, just as hedge funds have no use for management types whose skills extend no further than knowing to whom to whine when the going gets the least bit uncomfortable and an amazing ability to blow money on trendy piffles and useless enthusiasms, they also have no use for even the best commercial lenders and underwriters. So the banks may be left with a bunch of half-wit traders but also will be left with individuals who are very good at the core crafts of commercial and investment banking—commercial lending and securities underwriting. Sure, banks, especially investment banks, must do some trading to support their issues, but they have no need for the fancy, convoluted trading that turned them into hedge funds on the taxpayers’ dime and so mightily contributed to our financial misfortune. And they will be able to find some traders, even at reduced pay levels, capable of doing such ancillary trading. But a major defection of the types of traders who make hedge funds work may force banks back into their core businesses, much to the benefit of their shareholders, the financial system, and the American economy.