jon

re:Are performance-based pay structures partly to blame for the mortgage crisis?

It states that managers with bigger bonuses are more likely to take risks. It proposes this is because of the bonus structure.

However, it could be just as true that taking a big section of your pay as a bonus is in itself a risk. Offering a risk heavy income may ATTRACT risk heavy people, regardless of how the bonus is calculated.

WholeMealOfFood

The performance-based pay article is precisely the argument for why hedge fund managers' carried interest should be taxed as a management fee and not as capital gains: they do not bear the same downside risk as investors.

amit

The New Yorker article starts with a reasonable thesis, but does a poor analysis.

Hedge funds are among the many consumers of mortgage backed products, so they are the victims - albeit victimized by their own greed. But so is every party in the chain from the home buyer to the mortgage seller to the bond seller.

The subprime mortgage market has been driven more by the performance bonus (ie. greed) of those who are signing up people for the mortgages and the salespeople that are selling the mortgage backed products.

Sure the performance based fee of hedge funds encourages risk taking, but in a hedge fund a large portion of the princials' net worth is in the fund, so that is a major disincentive for getting blown out, as is getting sued.

On the other hand if you are a bond seller in an investment bank your potential upside is a a massive bonus but you don't face much downside. The worst you can do is lose your job. So it is in your interest to push these subprime mortgage backed products on to your clients.

Read more...

jon

re:Are performance-based pay structures partly to blame for the mortgage crisis?

It states that managers with bigger bonuses are more likely to take risks. It proposes this is because of the bonus structure.

However, it could be just as true that taking a big section of your pay as a bonus is in itself a risk. Offering a risk heavy income may ATTRACT risk heavy people, regardless of how the bonus is calculated.

WholeMealOfFood

The performance-based pay article is precisely the argument for why hedge fund managers' carried interest should be taxed as a management fee and not as capital gains: they do not bear the same downside risk as investors.

amit

The New Yorker article starts with a reasonable thesis, but does a poor analysis.

Hedge funds are among the many consumers of mortgage backed products, so they are the victims - albeit victimized by their own greed. But so is every party in the chain from the home buyer to the mortgage seller to the bond seller.

The subprime mortgage market has been driven more by the performance bonus (ie. greed) of those who are signing up people for the mortgages and the salespeople that are selling the mortgage backed products.

Sure the performance based fee of hedge funds encourages risk taking, but in a hedge fund a large portion of the princials' net worth is in the fund, so that is a major disincentive for getting blown out, as is getting sued.

On the other hand if you are a bond seller in an investment bank your potential upside is a a massive bonus but you don't face much downside. The worst you can do is lose your job. So it is in your interest to push these subprime mortgage backed products on to your clients.

Read more...