Saturday, February 22, 2014

I offer mine own scalp

[This was left as a draft in 2009 and only published 5 years later.  I no longer work for the hedge fund]

Confession: I work for a hedge fund.

There, I said it. I am not proud of the fact. In fact, I am more than a bit embarrassed by that fact. But the fact of the matter is that I had retired from the world of finance in 2005 to become a small-time merchant, and even smaller-time farmer, and a person who would live in a small community in a small home and with few luxuries, internet service being one of the few.

In short, I had decided to downsize. During my entire Wall Street career to that time I had deep misgivings about the sector. The people who work there fall into a few camps and across the range from rather dull to extremely bright but all obsessed with money and status.... Status of various sorts, but status nonetheless. The dullards were horribly overpaid for their services, the brilliant wasted chasing basis points when they should have been inventing solar panels or cures for AIDS. Then there were the true financiers: not terribly smart but driven by the golden calf. Very slimy in general and only concerned with their personal fortune and power. In other words, verging on evil.

And aside from my personal dislike for most of my colleagues on one level or another, I did not think that more than 30% of what was being done was of very much value. And it only got worse as the market I was in started dealing in Credit Default Swaps, something that at the time I warned was no better than gambling. It should be outlawed I said four years ago before riding off into the sunset.

But this post is not about CDS either. I might write directly on that subject next time, but not right now.

I say that as background.

Tuesday, October 20, 2009

Once more into the breach!

It is time to return to the blog. I've been so busy that I've neglected it. Not that you are reading this, but in case you are, mahvelous!

It almost came to blows the other evening. I gave a neighbor a ride from Santa Fe to her house in Madrid, NM. She'd recently read Naomi Klein's "The Shock Doctrine" and proceeded to tell me how evil Milton Friedman was, how capitalism is destroying the Earth, enslaving poor Chinese, etc etc etc.....

There was no reasoning with her that Klein, a journalist with a deep ideological bent, has zero idea what Milton Friedman actually stood for and how many billions of people have been lifted out of crushing poverty by the freedoms he advocated.

In any event I really don't have time to expound on this at the present, but I may well yet do so....

Friday, August 7, 2009

This was requested

By commenter on Reason's blog so I took the 5 minutes to make it and send it to him.

Sunday, May 31, 2009

If I had a zilllion dollars

I would run this on television as an ad during the Super Bowl and American Idol....

Thursday, March 12, 2009

Economic Crisis Reaction: Liberal vs Conservative.

I live in a remote-ish mountain region in New Mexico. It is a relatively poor town – lots of people relying on the local food bank, free-cycling, odd jobs, etc. There are liberals and conservatives (I use the Common American Usage here), anarchists and libertarians, communists, socialists, hippies etc etc. In other words: people of all stripes. One thing I have noticed is the gap between liberals and conservatives in reaction to the economic crisis:

“Get a gun, stockpile canned goods and gold. Generator. Create defensive perimeter. Stockpile fuel. Self-sufficiency and self-defence”

“Community garden. Food bank. Clothing drive. New Free Box. Share firewood, water, living space. Fundraiser. Festival.”

As much as the latter group annoys with their earnestness, believe in nonsense, lack of basic economics understanding and generally poorer work ethic, conviction that “the man” is out to get them, they really do have a better attitude.

It’s amazing: the people who cannot plan, cannot organize, and generally do not exhibit the greatest skill-set are the ones who try while the planners, organizers and generally more skilled retreat into their own. If there was some way to blend the two, that would be formidable. Of course, such has been the power of the free market when times are good and the economy is growing.

Friday, March 6, 2009

Where have I been, you ask

Working in a coal mine, going downtown. Working in a coal mine, going down town.

Lord I am so tired, how long can this go on?

Seriously. Work and life has made me a bad blogger. With any luck I will get back to posting.

For now we have a picture....

Friday, December 19, 2008

Wall Street: Changing one incentive structure

I worked on Wall Street for 10 years and recently re-upped with a hedge fund with an eye to taking advantage of the current crisis to make a little money – at least for a while. So I know something about the perverse incentive structures on Wall Street. There are many of them, but today I want to discuss the bonus problem.

There are a number of problems with Wall Street bonuses, one of them being that they are disproportionate to other, in many cases more worthwhile, professions. This has caused Wall Street to drain off many very talented people from other parts of the economy where rather than shuffling bits of paper about making numerical profits, they could be curing disease or figuring out how to make a better solar panel. I do not joke: many of the main “quants” I worked with were chemists, physicists, mathematicians, statisticians etc whose talents could have been (and hopefully will be) employed better.

More importantly, the bonus cycle causes a number of other perverse behaviors. Since the base salary does not provide the lifestyle most employees live beyond their monthly means and rely on the bonus to bail them out at the end of the year. The problem here is that it has become impossible for bonuses to be paid only for exceptional work. Rather as it is the lion’s share of annual income it is expected. “No Bone” is hardly ever “No Bone” but rather some smaller amount. A true zero bonus has often been used as a sign that it is time for a person to move on.

What is to be done?

I think that the bonus culture is entrenched and could be reformed so that it works as it should. I would have the bonus carved into three equal tranches. The first would be the cash bonus as it is now. The second would be an all equity tranche that would vest one third after three years, and another third after four and a final one after five. The final equal tranche would be paid after three years.

This way not only would the worker have an interest in the health of the firm, he would also have an incentive to not get himself fired (fired with cause and you lose your outstanding payments) and also not to lose money. If your contribution were ever negative, the firm would be able to claw back any or all of your future payments.

This way that trader I worked with who, in advance of the Russian Crisis, loaded up on Russian risk and was paid handsomely would not only have lost his job when it all went pear-shaped, he would also have lost most of his income from taking risks others of us warned him about. Instead he made a ton of money and walked away laughing even as the firm almost went under.