Bailout

How investment banking is like a video game

By Felix Salmon

Paul Kedrosky is nominally talking about a Swedish poker player, but really he could be talking about any number of i-bankers, hedge-funders, and private-equity types:

Isildur1 isn’t playing to make enough money to retire. He’s playing a video game, and trying to run up the highest score. That the score is denominated in dollars is only of nominal importance.

The question is whether and how, in a world populated by such men (and they’re always men), one can alter compensation to prevent untoward risk-taking. Isildur1 poses no systemic risk; the same cannot be said of Jimmy Cayne or Dick Fuld, or even Jon Meriwether, circa 1998. If they take their compensation in stock, and that stock rises quickly, that only serves to accelerate the rate at which their high score is rising, and to encourage them to take ever-greater risks.

The real problem here, I think, is that these men became so rich so early on in their careers that they’ve long since left the normal world of needing to make money so that they can spend it. Tying up compensation in long-vesting stock doesn’t change that: only a drastic cut in total compensation will solve this particular problem. And that’s one thing which is certainly not going to happen.

Full post as published by Macroprudential on December 09, 2009 (boomark / email).