A big brokerage was once in trouble and sold to a large bank with wide shoulders (under friendly pressure of the Fed looking to reduce systemic consequences should the brokerage house default). A few months later, disturbing news leaked to the press. To keep the faith in the system in front of blatant information manipulation became hard, even for optimistic believers that "we all have Buddha's nature".


Some $1.2m for office refurbishment were reported.

For days, silence prevailed. Then the ex-CEO of the ex-brokerage announced that this sum covered the office but also two conference rooms and a reception area. Fair enough... Later, he also declared in an interview to a TV network that the aforementioned office really needed renovation, as it definitely was unusable as it was. Fair enough... But then, he nonetheless added that he should have paid for the renovation himself... If what precedes is true, that doesn't make any sense, does it?


Losses of the brokerage ballooned supposedly at the last minute during the merger: after the merger approval by shareholders but before bonus payments and before the official confirmation of the merger. That may well be. It becomes disturbing when the ex-CEO finds an excuse in the fact that the late losses incurred almost entirely on legacy positions and due to market movements (a "complete breakdown in the functioning of the marketplace").

That may well be true, but I fail to see how this is an excuse. Managing market movements is the job of a financial institution, its bread and butter. If instruments supposed to behave similarly suddenly stop doing so (correlation breakdown), there are two possible situations: either the instruments are not equivalent (proxy hedging), or they are not liquid. Accounting standards would allow to value an illiquid position based on the value of the more liquid equivalent so the latter explanation is excluded (mark-to-market standards include a reference to orderly markets). One should interpret the ex-CEO as saying the hedging strategy was not effective. Again, hedging risks is the base line of this job so failing to find/execute the right hedge is not an excuse. Nobody can avoid mistakes entirely, so there's no need to hide though! The game is not about blaming the market when errors are made.

As for legacy positions, the same brokerage sold a few of them at a large discount months earlier. It is possible to exit such positions, admittedly not for free. It is also possible to hedge them (not for free). The reason legacy positions were kept most probably is because it was judged that the exit costs were too high by comparison to the risk, or that these positions were under-valued and had potentials for profits. Waiting for a better exit does not always pay. Making such judgements is perfectly acceptable and is constantly required. It is also impossible to be always right about them. But blaming losses (i.e. bad judgement calls) on the fact that the positions were inherited with the job does not dignify the loser. Even less so when the job was taken under the understanding that trouble was at the door and that compensation for coping with it was in tens of millions per year. That the positions really could not be traded back in the market previously implies they were probably not marked at the right price...


Finally, other reports were targeting bonuses, paid in "troubling" circumstances (to use the word of the New York General Attorney who came to consider this warranted "further investigation"). The bonuses were paid earlier than in previous years, so that they would clearly be distributed before the official merger with the wide-shoulders bank. In itself, why not? The reason the reports were disturbing was that bonuses were not so small, although the brokerage had lost money on the 4 quarters of the finishing year...

For days, silence prevailed. Then, in the interview to the TV network, the ex-CEO of the ex-brokerage explained everything. Unfortunately, I visibly am too stupid to understand.

He defended the billions ($ 4,000,000,000) of bonus by talent retention: if you don't pay the best people, they leave, right? Moreover, on Wall Street, salaries tend to be relatively low, because bonuses are an integral part of the compensation. While the latter is true (and is an issue addressed in the earlier post), the former is dubious in current markets. It is widely acknowledged that keeping one's job is the "bonus" in such times. Moreover, after dramatic failures, the amount of "talent"worth keeping may be questioned. Most people pretend learning from their mistakes, few actually question how they operate when troubles occur. It is unlikely so many zeros were needed to keep the few really talented employees of the company. Good performers legitimately hope for greater rewards than those received by poor performers, so indiscrimination in rewards have probably upset these few talented individuals indeed, hence failed to retain them.

The ex-CEO forgot to mention that bonuses were not yet announced to employees when the losses of the quarter suddenly changed magnitude mi-December. So, bonuses were still reversible or cancellable without any legal issue.



A lot of employees at the brokerage feel that the ex-CEO actually did protect (by saving the company, no less) the interests of the shareholders and employees he had to care for. Sort of, "the end justifies the means". That short-term interests were protected is un-debatable. But this does not make everything legal or ethical. Was the CEO of the recently uncovered $50bn ponzi scheme behaving appropriately then, for taking care of shareholders and employees? Is clearing half the planet of its population so that the other half can enjoy more resources acceptable? Is invading a country for oil resources (based on lies regarding weapons of mass destruction) acceptable? Taking care of the short-term interests of a minority is not enough. First, long-term matters (what confidence is left? what franchise is left?). Second, human rights matter (property should be unalienable in our societies and this covers the shareholders of wide-shoulders bank). Third, is humanity just about self-interest?

Tough decisions had to be made and they were probably difficult to make. Ethics guide great leaders in such times though; not everything is acceptable. And taking responsibility for one's actions is a must. Errare humanum est, there's no need to manipulate the information to pretend otherwise.