
Much of what investment bankers do is socially worthless (2010) - Aloha
http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy?currentPage=all
======
zacinbusiness
I find the whole banking world to be fascinating, much in the same way that I
find the topic of cancer to be fascinating. Both are extremely complex and yet
fundamentally simple. Don't get me wrong, I'd much rather have a bank than
have cancer, I'm just saying that I love learning about how these complex
systems work, how they work with (and against) other systems, and so forth.

In the case of international finance, I think it's really cool how an
institution can help another institution raise capital, move debt, and
mitigate losses. Like any system that involves independent actors, banking can
(and usually is) diseased by those who are able (both intellectually and
financially) to game it for their own gain and to the detriment of the system
as a whole.

Banking, it seems, is almost aware of how self-destructive it is. These
entities take on complex risks that the smartest people in the world can
barely understand and they hope that everything will "just work" or, when
things don't work, they rely on their overall value to the system - we can't
let banks fail.

Still, I don't think all bankers are socially worthless. They help to create
confidence in the banking system and in finance in general. It's only the
"bad" bankers that are worthless, and even then they are only worthless to
those who stand to lose if they fail.

~~~
digitalengineer
Banks can do whatever they want. It's the Bail-Out part that bothers me. But
the Bail-In (The Cyprus Template' where the saver's money is confiscated)
that's even more scarier. Check out this Bloomberg chart:
[http://imgur.com/mjkOn1W](http://imgur.com/mjkOn1W) If I understand correcly
my savings are noted as 'an investment in the bank'. Nice...

~~~
klipt
So student loans can't be written off, but savings accounts can? Weird world
we live in...

~~~
digitalengineer
Ah yes, the student-loans. Incredible world indeed. Personal debt that
enslaves people for live is okay, but writing off big bets by big banks (or
entire countries!) is no problem. On a side note: the more a student can
borrow, the more the cost of education rises... This is made possible by
governement as well as banks by the way. I feel Iceland did it right: let the
banks go bust and even write off personal debt of people's morgage.

~~~
Nursie
>> the more a student can borrow, the more the cost of education rises...

Yeah, it's like house prices. Houses inflate to whatever people can afford. So
when the price of houses goes out of reach of a lot of people (like here in
the UK) the _obvious_ solution is for the government to demand people get
easier access to debt, and to start pumping public money into the housing
market. Because that totally won't just inflate the prices further...

~~~
digitalengineer
Oh yeah, it's the same thing overhere. I used to love watching the BBC's
program where people "flipped" houses. Nowadays the reruns come with a
official warning, ha ha!

------
yummyfajitas
This article seems to be making quite a few implicit assumptions that should
be made more explicit:

 _Meanwhile, big banks also utilize many kinds of trading that aren’t in the
service of their traditional clients. One is proprietary trading...There’s no
social defense for this practice..._

Implicit assumption: speculation is socially worthless.

 _“You mean to tell me your work as a [fill in the blank here] is worth more
to society than a firefighter? An elementary school teacher?...”_

Implicit assumption: pay is or should be proportional to gross utility rather
than marginal utility.

Apart from this it's typical economist claptrap - thousands of words, no real
point. Why is it here?

~~~
theorique
_Implicit assumption: speculation is socially worthless._

And a further assumption that jobs that are deemed "socially worthless" ought
not to be done, or ought to be prohibited. In which case professional poker is
on the chopping block, or professional athletics is banned because it is
deemed to have less "social value" than its compensation level.

 _Implicit assumption: pay is or should be proportional to gross utility
rather than marginal utility._

Or that pay needs to be determined by some official, 'blessed', committee of
professional economists who publish a list every year of salaries, based on
how much social and economic value is provided by each field of work.

(Sounds kind of Soviet, actually.)

~~~
Nursie
I'm not sure the argument is that jobs which are not useful should be
prohibited, but perhaps it is interesting to try and figure out what it is
about our current system that disproportionately rewards the people that
juggle with money over and above (for instance) people that teach our
children.

I'm not arguing for a centrally defined salary committee, but surely you have
to wonder if there is a better way?

~~~
yummyfajitas
_try and figure out what it is about our current system that
disproportionately rewards the people that juggle with money over and above
(for instance) people that teach our children._

This has been well studied. The answer is that compensation is proportional to
_marginal_ productivity rather than mean productivity.

I.e., consider a very important profession, say superhero. Having one
superhero to stop the Joker is worth $1M. Having two superheros is worth $1.1M
- Batman is sufficient to stop the very dangerous Joker, but two superheros
can stop both the Joker and the far less dangerous Harleyquinn. The _marginal_
productivity of an extra superhero is $100k even if the _mean_ productivity is
$550k. As a result, superheros get paid $100k because if any superhero quits,
society loses only $100k rather than $550k.

An extra banker produces a lot of value. An extra teacher produces very
little. Hence, teacher pay is lower than banker pay.

(As a proponent of the signalling theory of education, I'd also argue that the
value of a lot of education is actually negative.)

~~~
nimble
> An extra banker produces a lot of value.

For some value of "value".

(Also, the example of two superheros isn't a good one - they will probably
collude and get something much closer to their full value)

~~~
maxerickson
In context, value for the bank paying the banker.

It's also the case that marginal arguments are very clear when the examples
use small numbers. It has the side effect of making them sound silly. But I
guess there are not 2 of very many real professions.

------
smsm42
I'm afraid if we will start measuring people by their "social worthiness" we'd
very quickly arrive to conclusions which most readers of the New Yorker would
be very reluctant to support. At least I hope they would.

~~~
cousin_it
Will we also get to these horrible terrible conclusions if we start measuring
_jobs_ by their social worthiness?

~~~
smsm42
Probably. If you want to be a history scholar but the society decides it'd be
better off if you dug trenches or picked apples - would that be horrible
terrible for you or just fine?

~~~
cousin_it
It would be horrible terrible if society ordered me to go dig trenches, yeah.
But if society merely stopped paying me 500K a year to be a history scholar, I
think that might be acceptable. That is, if being a history scholar were as
worthless to society as the things investment bankers allegedly do.

~~~
smsm42
Society does not pay any banker 500K. Their clients and employers might. If
you want to prevent it because you think it's bad for the society - it is the
same idea as sending you to dig trenches because society thinks it's better
for you to be this way. If the society can remove the banker from his job - he
can remove you from yours.

~~~
rubinelli
Actually, it's the other way around: investment bankers conned society into
giving them cushy jobs. When you look at the bulk of those accounts, what so
you see? Pension funds. How much control do average people have over their
pension funds? Almost none, because there are all kinds of rules and
regulations "to protect the public" \-- except that they don't, so the cycles
of haphazard investment and bailouts repeat themselves.

~~~
smsm42
>>> because there are all kinds of rules and regulations "to protect the
public"

So what you need to fix this? Of course, more rules and regulations. Because
there's no problem with rules and regulations that can not be fixed by more
rules and regulations.

------
netcan
Most criticisms of banking as a whole are largely about the moral hazard
issues. Seeking out and creating lopsided risk that can be partially offloaded
onto the public while the rewards to those risks can be captured by the bank.

There is a fantastic web series called the " _Gervais Principle: The Office
According to The Office._ (1)" The central thesis is that organizations have
three types of employees: Sociopaths at the top. Clueless in the middle.
Losers on the bottom. The defining characteristic of the Sociopaths elite is '
_the basic heads-I-win-tails-you-lose pattern behind all Sociopath
machinations._ '

Strangely, this fun piece changed how I look at moral hazard. Before, I
thought of it mostly as an inevitable consequence of badly designed systems.
Similar to employee reward schemes that employees learn to manipulate in a way
that is detrimental to the business or cobra bounties intended to reduce the
number of snakes in a city leading to backyard cobra farms. I thought it was
less of a problem in emergent, evolved human systems. After reading this
piece, I think of it differently. It's a human psychology thing. Human systems
have assumptions about fair play built into them. Psychologically perverse
human (sociopaths) can take advantage of these assumptions.

I knew a guy from Uni. He was doing a Research Masters, badly. He failed.
Resubmitted. Appealed. Rewrote. Appealed, and eventually got a pass. He wasn't
really smart enough and he never understood the subject. But, universities
(especially graduate programs) don't really fail students. Students drop out,
especially the ones who struggle. Persistence can substitute for smarts and he
walked away with Masters from a top uni. I later learned that he got into the
Uni in the fist place with some hack. He applied to a second tier uni, and
used some clever clauses to transfer to the better one without having to go
through the front door admissions process.

We then proceeded to hound every big name in the field for references. None of
them wanted to read this pile of crap but again persistence can substitute for
quality and he eventually got some nice references and quotes. He used these
along with a professionally written resume and application letters ($450) to
land a sought after graduate job. Big government body that takes at least 12
months to fire someone. Excellent entry into the world of public policy
research. Before that happened, he had found a recruiter who specializes in
these guys. He moves jobs every 6-12 months which means a recurring bounty for
the recruiter and a raise for the sociopath. On getting a job they immediately
started planning for the next one, like a heist. He was so confident. It took
a remarkably long time for bosses & coworkers to figure out exactly how
completely useless he was. These people are rare. The systems assume they
don't exist and sociopaths take advantage of that weakness.

Around the same time I was hearing the story of a largish company (~$0.5b)
bought by a hedge fund and placed in the hands of an 'A-Player' team of senior
executives. I knew a manager and long term (20yrs) employee there who narrated
the story for me over a couple of years. Outsiders to the company and
industry, making salaries an order of magnitude higher than the previous
executive team. They proceeded to ruin the company. But, they managed to
conceal a lot of that. Milking or liquidating assets. SUing something like a
leveraged buyout to raise massive funds to acquire companies. The owners
eventually figured it out. The abysmal CEO and his team of executives were
paid to leave and every one landed a CEO/COO job at an even bigger company. If
they had happened on a win, I'm sure they would have done even better.

After reading 'The Gervais Principle' I saw a bunch of examples of these
'sociopathic machinations' that are much more available to the average person.
Just about any mid level manager at any company can take big risks. Draw up
massive plans for expensive expansions. Pitch advertising campaigns. Offer to
take on impossible product development. Propose to open a new office in
another country. Promise huge benefits and demand huge resources. Say you are
100% sure it will work. You might get what you ask for. If you get it, it
starts. If you don't, whats the worst that can happen? Maybe your proposals
get shot down by a sane senior. That might hurt your status marginally. No big
deal. You're more likely to walk away with a small win for initiative. If you
get the resources and proceed to balls up your project, you can always quit.
If you are in a position to find a similar job, thats not a big loss. If you
hit the eject button at the appropriate time and still walk away with a win.
You can time it so you are negotiating to be poached while running this doomed
program. If it all works out, you are the author of a coup.

A normal company is not resilient to this type of attack because its pretty
rare and it's not usually identified if it does happen. Companies are based on
an assumption that people aren't like that. The normal deal is that the
company takes on the relatively small risk of employees being unproductive. In
exchange they take all the upside. A sociopath flips it, taking on massive
risk the company is on the hook for and capture some of the rewards. They're
own risk is capped at a pretty low level so the more reward the better,
regardless of risk. In an extreme case they might lose their job and take a
reputation hit, but most likely they'll just leave and get a higher salary
elsewhere. It's like taking money out of a company account to the casino. If
you double it, you keep the profit. The moral hazard is always there. Most
people just aren't corrupted by it.

Moral hazard is the right word for this. Morality is what prevents it in
normal circumstances. Sociopath is a bad word for it, because it implies some
sort of born pathology. That probably exists, but more often it is a learned
behavior. Human morality is absorbed from the environment. If you get a bunch
of these sociopaths together, they will rub off on other people. That's how
sociopaths breed. It's like a cancerous meme.

I don't have suggestions for dealing with it.

(1) [http://www.ribbonfarm.com/the-gervais-
principle/](http://www.ribbonfarm.com/the-gervais-principle/)

~~~
tootie
Found this quote on HN a while back:

I divide my officers into four groups. There are clever, diligent, stupid, and
lazy officers. Usually two characteristics are combined. Some are clever and
diligent -- their place is the General Staff. The next lot are stupid and lazy
-- they make up 90 percent of every army and are suited to routine duties.
Anyone who is both clever and lazy is qualified for the highest leadership
duties, because he possesses the intellectual clarity and the composure
necessary for difficult decisions. One must beware of anyone who is stupid and
diligent -- he must not be entrusted with any responsibility because he will
always cause only mischief.

[http://en.wikipedia.org/wiki/Kurt_von_Hammerstein-
Equord](http://en.wikipedia.org/wiki/Kurt_von_Hammerstein-Equord)

~~~
wisty
A similar quote is commonly (mis?)attributed to Rommel.

------
jackgavigan
Money follows profits in the same way that water follows gravity - it flows
into every nook and cranny it can find. The rules and regulations governing
financial services are like the tanks and pipes through which water flows. If
there's a (loop)hole, it will find it and drip through. If the rules that
govern money are too weak, they will be eroded, in the same way that flowing
water erodes a riverbank.

Loopholes will always be exploited. If a financial institution decides not to
exploit a potentially profitable opportunity, someone else will (and reap the
rewards). After a while, your shareholders are going to be asking pointed
questions about why your competitors are more profitable. Eventually, you're
likely to be fired and replaced, or your company will be acquired by one of
your more profitable competitors. Thus, in a Darwinistic fashion, those who
exploit the loopholes prosper, while those to stand on their principles are
eclipsed and, ultimately, perish.

Risk and reward are inextricably linked. You can't have one without the other.
So, wherever you have the potential for profit (i.e. reward), you have the
risk of failure. The fact that some banks were allowed to become too big to
fail is a regulatory failure, and the regulators get their marching orders
from Congress, which is elected by the People.

It's also worth bearing in mind that the US government looks set to make a
handsome profit on its "bail-outs" (many of which were actually investments
into, or loans to companies, which have yielded dividend or interest returns):
[http://projects.propublica.org/bailout/](http://projects.propublica.org/bailout/)

~~~
mentos
"Don't hate the player, hate the game."

~~~
vernie
Why not both?

------
BadassFractal
Ever tried writing an NSF grant? The people who take 50% of the grant to help
you write a quality proposal also do something that is completely socially
worthless and in fact halves how much taxpayer money ultimately makes it back
into society. And no, that's not a form of "job creation" since it brings no
utility to society.

~~~
yummyfajitas
Or for that matter, ever tried teaching a class? The people who consume your
services generally forget nearly everything a few months after the final, yet
still earn a hefty premium over their peers who did not take sufficiently many
college classes.

------
phyalow
A lot of technology and software companies are also socially worthless. What a
load of drivel.

~~~
rodgerd
Arguably socially counterproductive. Smartphones are nice, but so was near-
full-employment in the 50s and 60s.

~~~
theorique
Why is that an either-or thing?

~~~
wolf550e
Not smartphones themselves, but the technology which enables smartphones also
enables automation of lots of jobs.

------
na85
Fortunately for investment bankers, much of what they do is not commercially
worthless.

Perhaps that's unfortunate depending on one's point of view and/or political
leanings but that's how the free market works.

~~~
rosser
_...but that 's how the free market works._

It genuinely baffles me that people might think of something's being socially
worthless, but commercially valuable as a _feature_.

~~~
na85
I guess you attach some positive connotation to the word "feature"? e.g. Apple
products have a lot of features that I find stupid, but that doesn't mean
they're not features.

Socially worthless or not, that's how the world works. I'm not trying to be a
corporate cheerleader. It is what it is.

~~~
surrealize
We, as a polity, control the rules of the system in which all this stuff
happens. If the system we've built exhibits behaviors that we find
undesirable, then we can change the rules.

For example, pollution is an activity which is often commercially valuable (in
that polluting can help a factory produce a given product without paying the
costs of mitigating the pollution). But it's socially undesirable, and we
restrict it. We don't just throw up our hands and say, "well, it's
commercially valuable, that's how the free market works, I guess we just have
to breathe brown air".

~~~
smsm42
No we do not control the rules. Quoting Antoine de Saint-Exupéry:

"If I ordered a general to fly from one flower to another like a butterfly, or
to write a tragic drama, or to change himself into a sea bird, and if the
general did not carry out the order that he had received, which one of us
would be in the wrong?" the king demanded. "The general, or myself?"

You can not just wish any rules and laws of human or physical nature. You can
tell people to fly like butterflies, but when they do not, your anger at them
would be misdirected. If you try to act as if there are no rules except ones
you invent, you, not unlike many socialists that imagine they can ignore the
laws of nature, are in for a lot of unpleasant surprises. You can blame the
evil capitalists - just like Venezuelan government, having mismanaged the
country for years to the point they have now shortage of toilet paper (why is
it always the toilet paper? that basic thing has some very bad luck with
socialists) now blames the capitalists and hidden enemies. But that won't do
you any good, as it doesn't do any good for them. Until you recognize the
rules of the system is not purely under your control, you won't get very far.

~~~
glesica
So the economy, as it is currently constituted, is the one, single way in
which things could be arranged and if they were arranged in any other fashion
the whole society would implode and we'd run out of toilet paper? Is that your
contention?

Because if it isn't, then you have to admit that we _can_ make _some_ changes
to the system. Reasonable people might disagree as to the type and extent of
changes that would "work", but they would all agree that _some sort of
changes_ would improve things. In other words, there are things the general
could be ordered to do that would not be absurd or impossible for a general to
accomplish, like marching around in shiny shoes, or invading another country.

Quoting a French dude doesn't make your argument better, it just helps
illustrate how little you thought about your words before hitting "reply".

~~~
smsm42
>>> Is that your contention?

No, it's not. Repeating for those who TLDR the pervious comment: you can not
just invent any rules you like. There exist rules that are there regardless of
your desires. I hope you see the difference between this and "is the one,
single way in which things could be arranged".

>>> we can make some changes to the system

Of course we can. We just need to understand we can not make _any_ changes but
just _some_ and in _certain ways_ , and those _some_ changes have to be done
right. People can fly. You just need to follow certain rules and do certain
tricks. If you try to fly without following those rules, you may die or be
badly hurt. So may a society if it tries to make changes without following the
rules.

>>> Quoting a French dude doesn't make your argument better,

I would advise you to familiarize yourself with who the "French dude" is. That
would make your life richer and your understanding of the world fuller. It
would also hopefully make you understand why I quoted him.

~~~
glesica
The comment to which you responded never said we can make up any arbitrary
rules we like, just that we can change the rules if they aren't to our
liking...

> We, as a polity, control the rules of the system in > which all this stuff
> happens. If the system we've > built exhibits behaviors that we find
> undesirable, > then we can change the rules.

Your comment, as you have explained it, is therefore completely pointless. You
were arguing with a straw man more or less.

------
cell303
Why make the implicit assumption that investment banking is at most socially
worthless? The scale doesn't end at 0 here. When evaluating the utility of
things (could also be technology) than the cumulative effect can be negative
as well.

------
Nursie
Of course it's worthless. They're effectively a parasite class, they exist to
direct money to themselves under the guise of directing it where it's needed.
They are so far removed from any/all productive work that the whole thing's
laughable.

~~~
refurb
You don't know much about the finance industry I take it?

~~~
Nursie
Depends if by "know much about" you mean "love unquestioningly".

In which case no, I don't "know much about" the finance industry.

~~~
refurb
Parasite class lends me to believe you think the finance industry holds no
value whatsoever.

If you're ever in the position to run a large corporation and need to raise
money publicly, you're free to sidestep the banks and do it yourself. You'll
probably get a sense of the value they offer at that point.

------
zaqokm
most of the things which most people do are socially worthless.

~~~
bittercynic
You should surround yourself with different people.

~~~
zaqokm
and here I was thinking I was the bitter cynic :)

------
CmonDev
Still more worthy than freemium games.

------
vfclists
The article is a long-winded piece of piffle that says nothing in particular.
I would say it was even planted by the banks themselves. After all it easy to
use soft criticisms to divert attention from the harsher ones that will
receive more attention in the absence of such mild diversionary ones.

Readers don't understanding the sheer duplicitous nature of the media, even
the liberal ones who appear critical towards the banks. They simply don't
explain the facts that would result in the public asking for bank chiefs to be
summarily executed like they occasionally do in China. It makes you wonder
whether the writer is a shill, whether the editor chose the most clueless
reporter to write about the issue, deliberately or otherwise. I never
understood why Max Keiser repeatedly called for the bankers to be hanged until
I read _Griftopia_ by Matt Taibbi. Its such an eye opener. I can't even
understand most of the instruments involved I see enough to understand why Max
Keiser called for their hanging.

Turner’s viewpoint _caused consternation in the City of London, the world’s
largest financial market_? Is the writer serious? That is the City sounding
like Brer Rabbit asking not to be thrown in the briar patch.

Let us take US for instance. $1.4 trillion would have been enough to pay of
the all subprime mortgages which were _allegedly_ at the heart of the crisis.
Why then will the bailout cost $15 trillion? Who then incurred the additional
$14 trillion in debt taxpayers, their grandchildren and their great
grandchildren are saddled with?

Turner's statement that what investment bankers do is socially worthless must
be the understatement of the millennium.

------
merkitt
Could online peer-to-peer banking replace this whole mess someday?

~~~
crdoconnor
Maybe one day, but not while wealth and political power are so concentrated.

------
axilmar
So many words to say that people in finance prefer short term investments that
are more profitable than long term investments, no matter what the
consequences of the short term investments are.

------
somberi
This article is from 2010. It is relevant today as well, albeit differently.

------
mankypro
Who is John Galt?

