Wall Street Math
One who is surprised, dismayed or shocked by the Wall Street (or any other street for that matter but I mean the banking community) behaviour, I would suggest to think about the motivation of a, say, a loan executive.
How and when he is paid? Right, at the end of the year based on the volume of loans committed. Does he give a shit about what will happen to the loan in three years? No, why would he? There are at least 3 reasons:
- got his bonus and is not giving it back if the loan is underperforming,
- in 3 years he will be either in a different department, or get a promotion as a high performer, or happily retire, etc.
- in 3 years something may happen - global financial crisis, merger, reorganization - that would delink his poor work from the poorly performing loan.
In other words, people are consistently encouraged to take a short-term view. One would say that in a good organization there is credit, checks and balances and other nice things. No. Often times, people on the higher level are also rewarded for a short-term performance of their subordinates and prefer to look the other way. When shit hits the fan, they are typically not the ones answering tough questions or giving up their wealth. Think Enron, the whole subprime frenzy, Barklays or maybe the bank you keep your money in. :-)
How and when he is paid? Right, at the end of the year based on the volume of loans committed. Does he give a shit about what will happen to the loan in three years? No, why would he? There are at least 3 reasons:
- got his bonus and is not giving it back if the loan is underperforming,
- in 3 years he will be either in a different department, or get a promotion as a high performer, or happily retire, etc.
- in 3 years something may happen - global financial crisis, merger, reorganization - that would delink his poor work from the poorly performing loan.
In other words, people are consistently encouraged to take a short-term view. One would say that in a good organization there is credit, checks and balances and other nice things. No. Often times, people on the higher level are also rewarded for a short-term performance of their subordinates and prefer to look the other way. When shit hits the fan, they are typically not the ones answering tough questions or giving up their wealth. Think Enron, the whole subprime frenzy, Barklays or maybe the bank you keep your money in. :-)