March 27, 2008 4:19
Wall Street CEOs have no idea how their firms make money
Michael Lewis on investment banks:
To both their investors and their bosses, Wall Street firms have become shockingly opaque. But the problem isn't new. It dates back at least to the early 1980s when one firm, Salomon Brothers, suddenly began to make more money than all the other firms combined. (Go look at the numbers: They're incredible.)The profits came from financial innovation -- mainly in mortgage securities and interest-rate arbitrage. But its CEO, John Gutfreund, had only a vague idea what the bright young things dreaming up clever new securities were doing. Some of it was very smart, some of it was not so smart, but all of it was beyond his capacity to understand.
Ever since then, when extremely smart people have found extremely complicated ways to make huge sums of money, the typical Wall Street boss has seldom bothered to fully understand the matter, to challenge and question and argue.
This isn't because Wall Street CEOs are lazy, or stupid. It's because they are trapped. The Wall Street CEO can't interfere with the new new thing on Wall Street because the new new thing is the profit center, and the people who create it are mobile.
Anything he does to slow them down increases the risk that his most lucrative employees will quit and join another big firm, or start their own hedge fund. He isn't a boss in the conventional sense. He's a hostage of his cleverest employees. ...
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Justin Fox is TIME's business and economics columnist. This is his blog. About the Authors
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Reader Comments (7)
Justin, do you remember that story about the young rogue trader who "made" millions off a bug in hsi computer trading system? Essentially, it gave him a tiny profit every time he converted 50 1K T-Bills into 1 50K T-bill or something like that.
So he just sat around and did that all day. His boss was happy he was "making" so much money and gave him a big bonus.
There was some strange twist, like that the trader had appeared in some gay porn or something like that.
Great story. I can't remember the details. I think it was at Kidder Peabody.
Posted by TomT | March 27, 2008 5:48 PM
Okay, I found it -- the guy's name was Joseph Jett. Wiki.
How come no one's made a movie about this yet? This has "Will Smith academy award" written all over it.
Posted by TomT | March 27, 2008 5:51 PM
if this true, it does not suroprise me. See in the UK, the word "CEO" is equivalent to "Fat Cat" these days, meaning striggling compnaies hire all these CEOs who come to the company but not trying to do anything. Instead are waiting to be sacked so that they get paid 7 figures "sacking" fee!
Ridiculous!
Dr. Colin Fu
http://www.ColinFu.com
Posted by colin | March 27, 2008 7:25 PM
Regarding liquidity puts:
Maybe I'm not that bright but it seems to me that the idea of liquidity puts by CITI on these CDOs is really, really stupid.
Granted, you might have a holder of these CDOs that might get into trouble with a margin call or a bad bet that would change there financial situation to a degree where they'd want to return some CDOs to CITI, but isn't it also likely that holders of these CDO would return them at the price they bought them for if the market for them began to sink. And if the market for CDOs sank for one holder of the CDO, it is also the case that the market for ALL holders of CDOs would show the same trend.
Therefore, the liquidity put was literally an $85 billion bet by CITI that the market for CDOs would never, ever go down.
That seems like a really stupid bet.
Posted by rrsafety
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March 28, 2008 9:05 AM
I'm not a CEO or a businessman in the traditional sense. However, Liar's Poker really explained the MBS excitement pretty well. Of course, it probably helps that my wife worked in the MBS for a close to 5 years.
Posted by Corey | March 28, 2008 9:43 AM
So, I ask ....What justifies these outsize salaries, bonuses, and perks these CEOs are pulling in? It seems to me they are compensated for failing miserably and wiping out shareholder value.
I'm convince us ordinary people are making to much of what it takes to make millions of dollars. It certainly isn't higher education. The majority of your mega wealthy simply got "An education" not an exceptional one. And it doesn't have much to do with working extremely hard. Just compare the wages of the hardest working people in our society to the least working.
Posted by SteelWheel1 | March 28, 2008 11:56 AM
I hate to be the one to quote from Dilbert, but:
2/23/2005
The only way to meet our sales target is by selling to customers who have bad credit.
That's okay. We'll get our bonuses before anyone realizes that receivables are worthless. The key to getting bonuses is acting surprised later.
I feel unclean.
Posted by Ffred | March 29, 2008 4:16 AM