Rewarding Black Swans

Consider this, a bank can only safely loan before it soon runs out of credible borrowers who are willing to service their debt. Fortunately, for bankers, this is the age where commitment to quarterly increases in share prices holds paramount over ethics and preservation of capital. In other words, bankers can turn to creative measures like continual and sophisticated rebundling of debt via credit default swaps and/or lending to borrowers with little or no credit worthiness. Armed with such an arsenal and newfound priorities, a globalised world with interlinked financial markets is the ideal playground to play for maximum returns.

Regardless of the color of our parachutes, we should all be Bankers when we grow up. Why? Never has one profession held the entire world at ransom while amassing great wealth for all its member (ok, maybe just for the upper ranks). Banking has become a profession whereby you are not held accountable for results and given a free rein to exploit the system to the hilt.

What the bankers didn't expect was for the world to come crumbling down. They doubt property prices will ever fall. But household prices fell as the property bubble burst. In an instance, nobody trust anybody and resulted in a global credit crunch. Carry trades crumble overnight. Commodities prices and currencies tanked. Yen surged as investors flee for safe harbor.

Though the dust has yet to settle and markets show little signs of bottoming out, bankers are still congratulating themselves for a job well done. They argued that hindsight is always 20-20 but they could not have been held accountable for such a collapse. Instead they are only responsible for their actions based on what they know when they made their decisions. Hence they have executed their duties to the very best of their abilities and should be rewarded handsomely. In fact, if they were not rewarded well, they will have to leave for greener pastures.
While much has been said about such compensation packages, Nassim Nicholas Taleb summed it up very well in his Financial Times article entitled "How bank bonuses let us all down".

"The incentive system put in place by financial companies has produced the worse possible economic system mankind can imagine: capitalism for the profits and socialism for the losses." Taleb wrote. (Bold by me)

He left this parting advice "No incentive without disincentive. And never trust with your money anyone making a potential bonus."