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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsHeads They Win, Tails We Lose
Many years ago MITs Andy Lo made a simple point (weirdly, I havent been able to track down the paper) about the distortion of incentives inherent in financial-industry compensation. Suppose youre a hedge fund manager, getting 2 and 20 fees of 2 percent of investors money, plus 20 percent of profits. What you want to do is load up on as much leverage as possible, and make high-risk, high return investments. This more or less guarantees that your fund will eventually go bust but in the meantime youll have raked in huge personal earnings, and can walk away filthy rich from the wreckage.
But surely, you say, investors will see through this strategy. They cant consistently be that stupid or naive, can they?
Hahahaha.
What brings this to mind is a new Center for Public Integrity report on the lifestyles of the rich and infamous finance honchos who brought down their companies and much of the world economy with them. So, Lehmans Dick Fuld gets to ruminate on what went wrong in his Greenwich mansion or his 40-acre ranch, or maybe his 5-bedroom house in Florida. Jimmy Cayne of Bear Stearns plays bridge from his $25 million apartment in the Plaza Hotel. And so on down the line.
So it really was heads they win, tails we lose, with all the incentives being to take maximum risks and let the taxpayers clean up the mess.
Luckily, it wont happen again, because weve had comprehensive financial reform. Right? Right?
http://krugman.blogs.nytimes.com/2013/09/14/heads-they-win-tails-we-lose/
But surely, you say, investors will see through this strategy. They cant consistently be that stupid or naive, can they?
Hahahaha.
What brings this to mind is a new Center for Public Integrity report on the lifestyles of the rich and infamous finance honchos who brought down their companies and much of the world economy with them. So, Lehmans Dick Fuld gets to ruminate on what went wrong in his Greenwich mansion or his 40-acre ranch, or maybe his 5-bedroom house in Florida. Jimmy Cayne of Bear Stearns plays bridge from his $25 million apartment in the Plaza Hotel. And so on down the line.
So it really was heads they win, tails we lose, with all the incentives being to take maximum risks and let the taxpayers clean up the mess.
Luckily, it wont happen again, because weve had comprehensive financial reform. Right? Right?
http://krugman.blogs.nytimes.com/2013/09/14/heads-they-win-tails-we-lose/
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Heads They Win, Tails We Lose (Original Post)
phantom power
Sep 2013
OP
Octafish
(55,745 posts)1. Heard this morning on NPR that Mr. Larry Summers was instrumental in getting Dodd-Frank passed.
And how sad it was the bad liberals had torpedoed the guy's nomination before it happened to run the Fed. Of course, the report didn't mention how even the best stuff that got axed out from Dodd-Frank wouldn't prevent the taxpayers from having to bailout the casino when the next crash comes.
Thank goodness for Krugman.
SheilaT
(23,156 posts)2. People are easily bamboozled. That's why all sorts of scams
continue. The Nigerian Letter is the best known.
Underlying all of this is the hopeful belief that anyone can get rich. It just takes some combination of luck and a little work. That belief is why too many do not understand the consequences of our current low tax rates on high incomes.
Meanwhile, the hedge fund guys understand exactly what they are doing.
gopiscrap
(23,763 posts)3. Time for a revolution