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Andrew Ross Sorkin has a good column today on banker pay, which has declined as the fortunes of big Wall Street investment banks have turned south. However, he insists that we look to a more opaque metric: the compensation-to-revenue ratio.
For publicly traded banks, increased profits from rising revenue is supposed to be returned to shareholders. But as Sorkin notes, there's a battle between shareholders and employees for the pieces of that pie. When the revenue-to-compensation ratio is out of whack — well above 50 percent, for example — it indicates that employees are winning.
This becomes especially apparent when the economy is in a bearish mood and revenues are lower. The conventional wisdom says that this is no time to cut compensation at banks. Sorkin expresses some mild skepticism at this notion:
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In this image made from video, a police officer uses pepper spray as he walks down a line of Occupy demonstrators sitting on the ground at the University of California, Davis on Friday, Nov. 18, 2011. The video - posted on YouTube - was shot Friday as police moved in on more than a dozen tents erected on campus and arrested 10 people, nine of them students.
One of the central problems with understanding the Occupy Movement is that, in America, we have no real recent experience with large-scale protests. It's not like police, mayors, members of Congress, university presidents, of even President Obama himself have been studying the country's last major protest movement, again the Vietnam War.
Some of these leaders have no excuse. They lived through Vietnam. Some were on the protest battlements themselves. Some were in the actual war.
The result is that the country is dangerously unprepared for what has suddenly morphed into an increasingly violent showdown between Occupy protesters and the authorities.
Last week, I suggested that another Kent State shooting is unlikely. "Kent State" is popular shorthand for a 1970 massacre at Kent State University in Ohio, when national guardsmen killed four students and wounded nine, prompting a national outrage and signaling the beginning of the end of the Vietnam War, as well as much of the romance of the countercultural 1960s.
Emanuel Derman is a professor of finance at Columbia University and also a physicist. But what' he's probably best known for is his years at Goldman Sachs in the lead-up to the financial crisis and his role as one of the pre-eminent Wall Street "quants" — investment professionals who attempted to use complex quantitative models to drive risk out of making money. These days, some critics blame the quants for nearly destroying the global financial system.
Derman chronicled his Wall Street days in a 2004 book, "My Life as A Quant: Reflections on Physics and Finance" — a full four years before the financial crisis truly took hold in late-2008. He's now followed that title up with "Models. Behaving. Badly," in which he looks back on both his life and his life's work and...finds fault with the world that he in part helped to engineer.
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Traders making money at the New York Stock Exchange. Just maybe not as much money as they used to.
Max Abelson (via Paul Krugman) writes at Bloomberg about bankers and their struggles to live on half a million a year, in the face of government regulations and more work than ever:
Michael Karp, 42, CEO of New York-based recruitment firm Options Group Inc., said Wall Street pay will fall 30 percent this year, and more for executives. It will be flat or down even in businesses doing relatively well, such as emerging markets and commodities, he said.
Karp said he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks.
The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus.
“This is very demoralizing to people,” Karp said. “Especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.”