Bonus culture The basic reason to work in finance is that, traditionally, it was the industry where you could get the most leverage on being smart. If you're a brilliant kindergarten teacher, you can make somewhat more money and have somewhat more pleasant working conditions than an average kindergarten teacher. If you're a brilliant engineer, you can build a brilliant new machine that sells for a lot of money, but you will need to work with a lot of other people and a lot of capital goods and it will take a long time and you will have to share the money with the other people. If you're brilliant at picking stocks that will go up—or down, or finding weird tricks in credit-default-swap documents—you can become very rich in very short order without much else. And so finance has for a long time attracted sort of miscellaneous smart people. Not always, and people often argue that this is a relatively recent development, that before the rise of financialization in the 1980s or 2000s or whatever, smart scientists became cancer doctors but now they become investment-bank quants. But at least for some number of recent decades the financial industry attracted some people who were deeply interested in finance, but also a lot of people who were just good at school or math or problem-solving and who had been told that finance was where the money is. If you are good at solving puzzles and you're passionately interested in one puzzle, you devote your life to solving it. If you are good at solving puzzles but mostly indifferent about what puzzles you solve, you might as well solve some lucrative ones. Anyway this is just a funny quote: What's coming is increased bureaucratization, an evolution that renders individuals' judgment less important -- and with it the need to reward them as they might have once expected. "We want to hire people who are less driven by their own bonus and P&L and more by the long-term goal of what the market will look like in say 10 years," said London-based Purves. "The idea that you are responsible for your own destiny has gone. It's a team sport now." I mean it's right as far as it goes; I don't disagree with the analysis. And I appreciate that he's putting a brave face on things. I just … are there people who … care that much about improving the efficiency of financial markets? There are lots of people who say they do, but traditionally "improving the efficiency of financial markets" is just a euphemism for "making a lot of money trading derivatives." What if you took it seriously? Like, imagine, there you are, a college senior, going from your Teach for America interview to your interview with Chris Purves of UBS Group AG's Strategic Development Lab. At TFA they're like "we can't pay you a lot, but we're looking for people who want to make a difference in the lives of underprivileged children and improve educational outcomes in America." And then you go to UBS and they're like "we can't pay you a lot, but we're looking for people who want to make a difference in what the market will look like in 10 years." And you are like "well improving education is great but the really important work is in improving bond market liquidity, sign me up"? Really? The quote is from a Bloomberg article titled "The End of the Bonus Culture Is Coming to Wall Street," about how banks' trading operations are now looking for coders rather than gut-instinct-driven traders, and also paying them less than they used to: But it's not just about the amount of compensation reducing. Bonus culture is now at stake -- with tech platforms center stage, traders may no longer be paid on an "eat what you kill" model, but will have their bonuses determined more by the strength of a broader desk or unit. "Good traders used to be easily identifiable," said Tim Hall, who spent more than 20 years in banking including at Credit Agricole SA and ING Groep NV. "Now trading is very commoditized and you're being replaced by platforms and robots and people with different skillsets." I mean, it still pays more than teaching. The Bloomberg article is perhaps best read in conjunction with this New York Times article about the "techlash" in college recruiting: Young people used to believe that going to work on ad-revenue maximization at a social-media company was somehow the best way they could contribute to the world, but now they have come to realize that there might in fact be higher values than maximizing ad revenue at social-media companies. Many students still see employment in tech as a ticket to prosperity, but for job seekers who can afford to be choosy, there is a growing sentiment that Silicon Valley's most lucrative positions aren't worth the ethical quandaries. "Working at Google or Facebook seemed like the coolest thing ever my freshman year, because you'd get paid a ton of money but it was socially responsible," said Chand Rajendra-Nicolucci, 21, a senior at the University of Michigan. "It was like a utopian workplace." Now, he said, "there's more hesitation about the moral qualities of these jobs. It's like how people look at Wall Street." Well! Meanwhile on Wall Street they're all "well there's no money here but at least you are improving the world." And that message is … not exactly resonating with the youth of the University of Michigan? Yet? It's a pretty obvious point that "the tech industry," broadly, has (at least partially) displaced the financial industry as the default destination for miscellaneous smart people. Partly this was a result of good PR in the tech industry, convincing people that solving the puzzles of ad-revenue optimization for social media was somehow more intrinsically interesting and socially virtuous than solving the puzzles of trading-revenue optimization for a bank. But you should not discount the fact that the tech industry is also really good at giving people leverage on being smart: A lot of people have gotten very rich very fast on the strength of good ideas and puzzle-solving skills. Richer, faster, in many cases, than in the financial industry. How can the financial industry compete with that? One simple answer is "become vastly more lucrative to outbid tech for talent," but there are some obvious difficulties with that. (Particularly at banks, which are sort of the big default finance jobs, the ones that attract a lot of directionless recent college graduates, and which are under particular pressures to become more boring and bureaucratized.) Another answer is, you know, the same way that every other industry—including tech—used to compete with the financial industry: by saying "oh sure you can make a lot of money over there, but money isn't everything, and don't you want to solve important problems and improve the world?" Only now the money is in tech and the important problems are in finance? It seems like a tough sell. Elsewhere in tech vs. finance: "Wall Street Fights 'Snake Oil' Rep in Pursuit of Bay Area Wealth." Yeah but how did those Bay Area people get all that wealth? Crypto basketball Should you borrow against your salary for three years at 4.95% interest? Uh, it's fine, I guess? That's much cheaper than a typical payday loan, or even a credit card. But borrowing against your salary is typically a sign that you are living beyond your means, that something has gone wrong with your financial planning. Of course if your salary just barely covers your bare minimum necessities and something comes up and you need a little extra money, you might have no choice but to borrow against your future earnings, and you should try to do that as efficiently as possible, but in general it is sort of frowned upon. And if your salary is $11 million a year, are you sure you need to borrow against it? What are you buying with that money? Not a house; you can get a mortgage for much less than 4.95%. Not stocks and bonds; you can probably get cheaper margin money, too. Not, like, groceries, because you can presumably cover your daily expenses out of your salary of $30,000 per day. I don't get it. Oh also blockchain blockchain blockchain crypto token Ethereum digital blah blah blah blah blah, sure: Brooklyn Nets player Spencer Dinwiddie said this week that his tokenized investment vehicle will launch on Jan. 13 in spite of the NBA's threat to ban him from the professional basketball league. … The bond will be issued with the help of security token platform Securitize, whose CEO Carlos Domingo announced the partnership on Twitter. "First bond being managed by a digital transfer agent operating on the Ethereum Blockchain," Domingo said of the deal in a message to The Block. ... The idea first surfaced in Oct. 2019 when Dinwiddie announced his plan to roll out an Ethereum-based investment platform, DREAM Fan Shares, to sell 90 tokens called SD8 coins, Forbes reported. The scheme would allow him to instantly collect up to $13.5 million off of his $34 million guaranteed three-year contract. Token holders would then receive monthly payments in the next three years with a 4.95% base interest rate. I know, I know, "tokenized investment vehicle," who can resist, but it is maybe the most boring financial innovation I've ever written about. It's a rich guy taking out a low-interest payday loan from his fans. He has no particularly good reason to borrow the money. Really the way professional sports careers work is that you make a ton of money every year for a relatively short time in your youth; you should emphasize saving that money to spread it out over a long post-NBA life, not accelerating it to spend even more of your salary up front. The fans have no especially great reason to lend him the money; 4.95% is not exactly a bad return on three-year money, but it is a novel and illiquid instrument, and the rate is comparable to what you get from, like, LendingClub. There is just a halo of blockchain blockchain blockchain that makes all of this a little bit more valuable to everyone. Dinwiddie gets a pointless loan, but it's tokenized. The investors get a pointless investment, but it's tokenized. They all get some utility from, like, telling people about their tokenized NBA player deal. On the blockchain. To be fair the original plan here was slightly more exciting. The idea was that you'd buy a share of Dinwiddie's three-year earnings, and those earnings were variable. The third year of his contract is a player option, and if he was able to earn more money, his token investors would get a piece of the upside: The third year of Dinwiddie's Nets contract is a player option for just over $12.3 million. And his original tokenization plan called for the possibility of significant dividends for investors if he elected to opt out of the final year of his deal in 2021 and come to terms on a more lucrative contract with Brooklyn or another team. Now I insist that income-based repayment of a personal loan is not, at this point, all that exciting a financial innovation either. It's an idea that's been kicked around for decades, we talk about it around here every year or so, I wrote a paper about it in law school, and it is now a common feature of federal student loans. Everyone knows the standard arguments for (risk mitigation, career flexibility, reduced financial stress) and against (moral hazard, adverse selection). But at least it's something. Investors buying the tokens wouldn't just be lending money to Dinwiddie at 4.95%; they'd be betting on him, buying financial upside in his NBA career. Dinwiddie, meanwhile, would be hedging his risks in a very sensible way: Pro sports careers tend to be short and risky, so why not convert some at-risk potential earnings into certain cash now? But of course if the investors were betting on him then that means he'd be betting against himself, which raises obvious adverse-selection and, especially, moral-hazard issues. Why work hard every day to be good at basketball to get a big contract, when you've already pre-sold (part of) that contract? The NBA knows about this issue, because everyone does; it is the most obvious and frequently discussed drawback of income-based loan repayment: If you are selling off some of your future income, you reduce your incentives to maximize that income. Also in sports, betting against yourself is particularly problematic: And that is where the NBA had some real issues, according to Dinwiddie. "Pretty much what they said was that the player option was gambling," he said, "and that would've been cause for termination." ... So the two sides came to a compromise, Dinwiddie said, where the original plan from October would mainly remain intact but the player option element would be removed. Yes that's boring, oh well. (For what it's worth—nothing—my sympathies are mostly with Dinwiddie here, but I can see the NBA's point. Not that Dinwiddie is really betting against himself or that he is really creating bad incentives, but he is creating a tough precedent. If you can sell 40% of your three-year earnings, with one year variable, why not 60% of your five-year earnings, with three of them variable? Why not 80% of your career earnings? If you let players tokenize their earnings freely, eventually someone is going to cash in at the top on his potential and then retire to enjoy the money. You can reduce that risk with some sort of line-drawing—only let players sell X% of their Y-year earnings after Z years in the league or whatever—but why would the NBA want to get into that exercise?) Oh fine there's one more non-traditional element, for a loan: Dinwiddie posted a video along with his announcement, including his promise to take eight of his investors to All-Star weekend in Chicago if he's selected to the game. Here's the video. "If I'm voted into the All-Star game," he says, "and my bond is fulfilled, I'm going to be giving all of my teammates Bitcoin. Not only that, I'm also going to take eight fans with me to the All-Star game. Part of the Spencer Dinwiddie experience for token holders." Buying the bonds is still a little bit of a bet on Dinwiddie (they get you a shot at All-Star game tickets), and it's a bet whose outcome you can affect (by voting for him). Incentives are aligned. Obviously this would be better if (1) his contract included a cash bonus for making the All-Star game, (2) that bonus was (partially) passed on to token investors as a cash dividend, and (3) the token was widely distributed so thousands or millions of fans would have a financial incentive to vote him into the All-Star game. That would be some good financial engineering. I suppose the NBA would never go for it. Carlos Ghosn PR Here is a funny Bloomberg article in which a bunch of public-relations professionals grade Carlos Ghosn's PR response to, uh, being arrested for financial crimes in Japan, fleeing the country in a box, and then giving a long belligerent press conference about it once he was safe in a non-extradition country. Some of their takes strike me as sort of well-intentioned but bizarre: "My advice would be to do something about the Japanese criminal justice system that you complain so loudly about. Not everyone is fortunate enough to escape prison, but if he's serious about it -- and it's not just an excuse -- he's got to make good on it. Partner with an organization, put up money, come to the aid of other prisoners. He can make something good come from this. That's the biggest part of restoring his reputation." No, he obviously doesn't care about that. Or: "The Ghosn brand is damaged. To restore it, the solution would be for him to ask for a fair trial in front of an impartial and objective court. In this way, he will not avoid justice and his rights will be respected." Uh, I mean, yes, if he is tried and acquitted before a fair court, that will help restore his reputation. On the other hand, one, he doesn't actually get to pick a court to try him, that's just his peevish fantasy, and, two, if he is tried and convicted before a fair court, that will be bad both for his reputation and for going to prison. (He settled related charges with the U.S. Securities and Exchange Commission, so it's not like he's self-evidently innocent.) This, meanwhile, from Jonathan Hemus of Insignia, strikes me as completely correct: "In a crisis, your strategic intent -- being clear about what success looks like -- should shape every subsequent decision and action. It appears that Carlos Ghosn's strategic intent is to live the rest of his life as a free man and this single goal is driving his words and actions." Yes! Right! The essential element of Carlos Ghosn's crisis-PR strategy was not holding a press conference in Lebanon, it was escaping to Lebanon in a box. The primary goal is not to spend the rest of your life in prison in Japan. The secondary goal is, like, get journalists to write nice things about you or whatever. That secondary goal is hard but honestly not that important; he has enough money and friends. That primary goal was really really hard, and he did it! That's all that matters. Synthetic cat Here's Simon Beard, via Tyler Cowen, on the late Oxford moral philosopher Derek Parfit: "Like my cat, I often simply do what I want to do." This was the opening sentence of Derek Parfit's philosophical masterpiece, Reasons and Persons. He believed that it was the best way to begin his book because it showed something important about people. Often we are not as special as we think we are. For instance, when people simply do what they want to do they appear to be utilizing no ability that only people have. On the other hand, when we respond to reasons, we are doing something uniquely human, because only people can act in this way. Cats are notorious for doing what they want to do, and the sense of proximity between a cat and its owner pleasingly heightens our sense of their similarity. Hence, there could be no better way for this book to begin.
However, there was a problem. Derek did not, in fact, own a cat. Nor did he wish to become a cat owner, as he would rather spend his time taking photographs and doing philosophy. On the other hand, the sentence would clearly be better if it was true. To resolve this problem Derek drew up a legal agreement with his sister, who did own a cat, to the effect that he would take legal possession of the cat while she would continue living with it. I … love it? Parfit wanted to own a cat, for certain specific purposes. He did not want to own a cat, for general purposes. If he could use some sort of derivative contract to acquire limited-purpose cat ownership from a full cat owner, giving him the specific ownership he wanted while leaving her with the residual general cat ownership, that would suit his purposes. Because his specific cat ownership needs were so limited—just being able to reference "my cat" in the first sentence of a book—the, uh, cat ownership swap that he required was correspondingly limited. Basically if anyone asked, his sister just needed to confirm "oh yes that cat who lives in my house is really Derek's cat, for philosophical purposes." A contract was drawn up, etc. It is very Parfitian—what does it mean to say that the cat that Parfit owns, transmuted by this legal relationship, is the same cat as his sister's cat, etc.—but it is also so pleasingly like financial engineering? A thing exists in the world, you abstract out only the legal entitlements that you need for your purposes, and you write a swap on those entitlements. You get the cat ownership you want (a brief and technically true reference in your philosophical work), your sister gets the cat ownership she wants (having a cat), everyone is better off, or at least not worse off. I wonder what else was in the contract. If the cat had to go to the vet would Parfit pay, like, 1% of the bill? Things happen U.S. Warns Iraq It Risks Losing Access to Key Bank Account if Troops Told to Leave. JPMorgan Puts Senior Credit Trader on Leave Over WhatsApp Use. 'We Need to Be a Technology Company': Wells Fargo Struggles With Aging Systems. Boeing Ex-CEO Denied Severance, Keeps $80.7 Million of Past Pay. Goldman Readies a Hiring Spree and Capital to Meet Its China Ambitions. Clashing With Your Colleagues Over Trump Can Boost Stock Returns. Behind Maduro's Latest Power Play: Reviving Venezuela's Collapsed Oil Industry. Swarms of Teeny Robo-Tractors Will Outmaneuver Tesla's Driverless Cars. "Results also showed that the stochastic process underlying the violent deaths of emperors is remarkably well captured by a (mixture) Weibull distribution." Middle Age Misery Peaks at Age of 47.2, Economist Says. "A womanizing tortoise whose rampant sex life may have single-handedly saved his entire species from extinction has retired from his playboy lifestyle, returning to the wild with his mission accomplished." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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