

Why do bankers make so much money? - cwan
http://rick.bookstaber.com/2009/10/why-do-bankers-make-so-much-money.html

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1gor
There is a lot of confusion as to what is called a 'bank', so it is difficult
to understand the author's analysis. I believe there are several business
models in place:

1\. Traditional deposit/lending.

Essentially, banks fund themselves short-term through deposits and then lend
long and medium term to businesses. This duration mismatch is always risky
(think of 'run on a bank'), but one can argue that banks perform essential
function in the economy by analyzing credits and channeling savings to
small/medium business.

2\. Transaction business

It is common for a major bank to have a lock-in onto most of day-to-day
transactions that people conduct. Salaries get paid by wire, then get
withdrawn through many of cash machines, letters of credit are written for
international trade transactions etc. For large corporate business, an
international bank can arrange financing for a new oil field, then distribute
this funds through its international branch network. This business is not
particularly high-risk and it is not 'immoral' however you look at it. It is
simply passing money around.

3\. Securities and derivatives trading

A broker firm who sits between the issuer of securities (or derivatives like
swaps etc.) and the buyer of securities/derivatives is not supposed to expose
itself to much risk. That's why they are called a 'broker'. Godlman Sachs is a
broker, and so was Lehman Brothers. They don't do deposit/lending business of
any significance. Of course, in real life they do proprietary trading as well
and can get hurt (like Lehman did, who carried a lot of unsold junk in its
books). These institutions can also can hurt others, stuffing their clients'
books with crap assets (like sub-prime mortgages etc.). But then... buyer
beware, isn't it?

Actually, even through the public lumps all three above business models into
'banks' category, I would stick to orthodox definition and separate them into
'commercial banks' (doing (1/2) above) and 'investment banks' (doing (3)).

So why so many 'banks' gone bust recently and why there is so much pain
around?

It is because 'commercial banks' from category (1/2) above took the easy path
and stuffed their balance sheets with securities/derivatives with embedded
nonlinear risk. They were supposed to do straightforward lending to
businesses, yet they went into buying 'AA' rated securitized junk. The same
applies to insurance companies who also have to carry assets on their balance
sheets to off-set their promises to policy-holders.

And now populist press are blaming traders/brokers for greed and irresponsible
behaviour of commercial banks managers.

As to the questions 'why do they make money', we need first to define which
'banks' are we talking about. Investment banks? Commercial banks? There could
be another post altogether.

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Retric
Some bankers make a lot of money for the same reason some football players and
CEO's make a lot of money. If you have a lot of money to invest you don't
don't need 50 people looking at your money. But, you want "the best" because
finance is something of a zero sum game. So you bid up.

Another option is to use leverage to take huge risks with other peoples money.
When a billionaire bankrolls you to bet in Las Vegas and you get to keep 20%
of the winnings plus a transaction fee, and they keep all the downside you
could make a tun of money. The secret is being good enough at math where it's
no obvious that this is what you are doing.

The other way finance people make a lot of money is the high end watch maker
concept where it's profitable to sell to rich people if you know how. The
might not get better returns than a well managed 401K but there is someone on
the other end of the phone to yell at when the stock goes down. Mix in some
confirmation bias and it's hard for people to notice when they are getting
fleeced.

PS: Another limiting factor is the number of people with the right pedigree.
There is only so many people that graduate the top of their class from MIT,
Harvard etc. Or who have a long history of flipping a large number of heads.

~~~
wallflower
> The other way finance people make a lot of money is the high end watch maker
> concept where it's profitable to sell to rich people if you know how.

"How to Sell a $35,000 Watch in a Recession"

<http://news.ycombinator.com/item?id=720719>

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patio11
I think bankers are an early example of a knowledge-worker occupation where
the amount of economic value produced by one's labor scales in relation to
deployed capital, rather than in relation to hours worked, and therefore they
command stupidly high salaries because (when performing properly) they should.

Bad news for anyone who enjoys income equality: I think they're not the last
occupation that will see this decoupling of returns from hours worked (which,
since everyone has a roughly similar cap at some fraction of 24 in the day, is
the ultimate thing keeping wages in the relatively narrow band people
associate with "normal" folks).

Many people take it as an article of faith that there is a 10x difference in
productivity between the best programmers and (take your pick) either average
programmers or the worst programmer in their organization. Almost no
programmers, however, are compensated at 10x the compensation of the average
or lowest performing member of their organization.

This is a sign of economic inefficiency. The market abhors economic
inefficiency. And the market generally gets what it wants.

I mentally consider myself in the middle of two engineers at the day job. One
of them is literally incapable of programming Java, and earns _to the yen_
what I do because our seniorities are equivalent. The other is the 10x
engineer -- 10x in relation to me, easily. He is older but his premium on my
wage is, hmm, 15%? 25%? Something like that.

One thing I have learned recently is that my skillset generates more value
than my salary quite literally while I am sleeping. That number is going to
keep increasing at a rate faster than my salary, and at some point the
essential conflict is going to deprive my company of my services. Honestly,
that won't be the world's biggest loss to them. What should worry them is when
math becomes inescapable to the 10x engineer, too.

~~~
btilly
_Many people take it as an article of faith that there is a 10x difference in
productivity between the best programmers and (take your pick) either average
programmers or the worst programmer in their organization. Almost no
programmers, however, are compensated at 10x the compensation of the average
or lowest performing member of their organization._

That's not an article of faith. It is a repeatedly measured fact. Pick up a
copy of _Peopleware_ for an explanation of how that was measured.

That said, in comparisons of programmers from different organizations the
single biggest factor in determining performance was the productivity of other
programmers at your organization. Part of that is that productivity is highly
environment driven. Part is that good programmers like to congregate together.
Either way you are very unlikely to see 10 to 1 ratios within an organization.
A ratio of 3 or 4 to 1 is much more realistic. (See _Software Estimation:
Demystifying the Black Art_ by Steve McConnell for a cite.)

Going back to the theme of the article, there is another reason for high
salaries, which is to provide a disincentive for bribery. You see this in an
obvious way with traders. Imagine that you're bargaining over the exact price
of a $10 million bond. Wouldn't you be tempted to offer $10,000 under the
table to the other guy if he'll agree that the bond is worth $100,000 more? If
the other guy was receiving a normal salary, wouldn't this offer be hard to
resist?

However are you going to risk the outrageous salaries that traders get offered
for a small bribe like that? And if you began taking bribes, you can be sure
that news would get around. (If for no other reason than that traders trade
that kind of valuable information around.) Which would make it hard to ever
get another job at that outrageous salary.

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nopassrecover
Because banks make a lot of money?

Banks probably pay higher because the kind of people attracted to wealth are
the kind of people motivated by wealth and in turn these people become
managers and hire other people purely with wealth.

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ig1
Client relationships primarily. Bankers make money because clients don't have
a relationship with an bank, they have it with an individual. Hence the
individual is worth a lot of money, hire the individual and get their clients.

Some individuals are paid a lot for individual specialist skills (analysis,
prop trading, etc.) - but these tend to be in the minority.

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DaniFong
I tend to phrase the question a little more humorously:

Why do bankers _have_ all the money?

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JoeAltmaier
In my experience, there is a strong positive correlation between people in an
organization that are empowered to write checks on the company account, and
their wealth. Cause and effect I cannot attest to.

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stevedekorte
Because they can "legally" commit fraud by lending 9x more (in the US) than
they have and the central bank will print money (devaluing everyone elses
money) in order to cover their losses if needed.

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teeja
Because they get to gamble with Other People's Money.

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c00p3r
Because they are risk-takers. Low risk - low reward.

~~~
gwern
When you are a banker, what is the risk? Are you quietly taken out back to the
shed and shot whenever you don't meet your quarterly target?

(Unemployment, you say? But that's the same risk my garbageman takes...)

~~~
camccann
The risk is losing a lot of _someone else's_ money, of course!

Of course, the financial sector in general is still a risk-taking operation,
even if the individual employees bear little to none of that risk (leaving
aside, for the moment, the whole "fail badly enough and the government will
save you using everyone's money").

