Part of the blame is due to the nature of management in banks. Senior executives concentrated on shareholder value, attempting, for example, to maximise return on equity, but did not fully understand the complex products which were being used to achieve this. Board meetings do not usually include lectures on understanding derivatives. They should. Would it be helpful to also educate the consumer sector starting in primary school about how systems work so that when they reach the age of accountability they can make informed choices and are not dependent on a junior finance person to guide them in major life borrowing ,saving , and investment choices
As a result, departmental managers, whose bonuses depended on trading profits, were allowed to dictate trading strategy. By ticking the boxes of risk management, they were able to convince boards that they fully understood and controlled risk. Yes exactly, risk management is not infallible,paradigms shift and those that work by formulas in the absence of understanding will not have the tools with which to cope when times go south
The debate is centring on executive pay being changed to allow a three year period before bonuses can be paid.I can't see this as fixing anything it just makes less incentive available at lower levels and still leaves inadequately equipped traders in a place of influence and lowers the standard as people who can get better positions with more incentive elsewhere will do that so that leaves the market with the left overs. If I am offered a bonus to 'do it right' but only have surface training on a need to know basis I will do fine in the years of plenty but in the years of famine I will wonder along with the populace where the money went. I was in Argentina several years ago when they closed the banks...managers were committing suicide enmasse they worked with what was entrusted to them and the fault was not theirs yet they carried the burden and guilt of failure for things they were not trained to do. These things never seem to reach the popular press but it was a sobering experience First, some of these products take longer than three years to become toxic. Second, traders will still be tempted to go off message if they are on bonuses. Third, only when downside risk - no pension, no payoff - equals upside potential will managers and traders truly change their behaviour.I agree this is the system of behavoirism and incentive and should go upstream beyond traders to the very top and trickle down
