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Comment by RiderOfGiraffes | Hacker News Reader

Quoting:

> Up and down Wall Street, financial types are grumbling that their industry’s highest highflyers are getting their pay capped. Many Wall Streeters say this would be disastrous. The sharpest financial minds will up and quit, the argument goes, and take their smarts with them at the very moment they’re needed to re-engineer their companies and restart the economy.

If they're really good, and they go into industry, won't that actually be better for the economy? It's hard to see what Wall St types actually contribute to the economy.

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It's hard to see what Wall St types actually contribute to the economy.

It's really unfortunate that people see things this way.

Somehow, the fact that I can -- in seconds -- convert money I earned at my job into a stake in one of thousands of businesses, many of them operating in multiple countries and offering multiple product lines (and the fact that the cost of converting my dollars into this stake costs less than, well, a good steak) is incredible. It's jaw-dropping.

It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.

It's astounding that an entrepreneur can take a business whose future profits can't be estimated to within an order of magnitude, and sell a portion of that business for a specific amount.

Finance is an incredibly valuable industry. Getting even some of this stuff slightly right creates a lot of wealth, and helps other industries create a lot more wealth. There have been excesses and there has been incompetence, but that doesn't change the fact that finance, in the aggregate, has been very beneficial.

It's really unfortunate that people see things this way.

It's also quite unfortunate that the wave of anti-banker populism seems quite lively on HN too. I thought we were better than that.

Its not anti-banker populism. Its the bailout mentality that these bankers have that's disconcerting. A startup that fails disappears the way its supposed to, but when a big bank fails we all pitch in the bail them out. That's the problem.

It's not anti-black racism. It's the welfare mentality that these black people have that's disconcerting. White people work for their success like they're supposed to, but when black people want to succeed we have to help them out with minority protection laws and quotas and such. That's the problem.

Whenever you generalise something to a large number of people, you commit some sort of anti-? ?ism. "Bankers" are not a singular entity that can have a "mentality".

When people are forced to patronize a service, they generally resent it.

These are important things for our society, but they were all done by retail bankers and brokers, not by investment bankers, hedge funds, PE firms, etc. Investment banks and PE firms actually help destroy value (most M&A deals lose money for shareholders).

In making such massively outlandish claims, data is required.

"The survey found that 82% of respondents believed the major deal they had been involved in had been a success. However, this was a subjective estimation of their success in achieving the deal objectives (see figure 2, on page 8), and less than half had carried out a formal review process. When we measured each one against our independent benchmark, based on comparative share performance one year after deal completion, the result was almost a mirror opposite. We found that only 17% of deals had added value to the combined company, 30% produced no discernible difference, and as many as 53% actually destroyed value. In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value."

- http://www.imaa-institute.org/docs/m&a/kpmg_01_Unlocking...

Lose money != destroy value. If you bought something that earned $1 million/year, and the next year it earned $900K, your acquisition may have destroyed $100K in value -- but it's still making nine times that.

I said that the acquisition loses money, not the company itself. In your example, the acquisition loses $100K, even though the company still makes $900K.

The problem of finance isn't that its results are intangible, they are tangible. So I agree with you on this point. Its that it's an industry with strong political ties, like automakers, that is simply not allowed to fail and is propped up unnaturally by taxpayers. Failure must be part of the way we do business, bailouts cannot.

> It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.

Precisely.

Spending a half hour reading machine-prepared brokerage statements isn't adding value to the process. Said investor has little knowledge of the actual operations of the mines, restaurants, mills, and insurance companies. Their gains have come from general market trends, hidden risk, and luck.

Basically, over-abstraction has encouraged investing based on market conditions rather than company fundamentals.

> Computer models will only get you so far when COMPLEX (read: disguised) financial instruments rely on past history, not future performance.

Actually, their gains come from providing an exit for folks who did all the things that you value.

How do you propose to let the people who do things that you like make money without letting them sell out to someone who won't do a damn thing?

erm, you quoted someone else, and aren't really addressing what I said.

I certainly don't have a problem with someone making a lot of money doing very little. However, I do think the idea that someone can "invest" without ongoing in-depth research is a scam.

The financial industry exists to make money by allocating resources to where they are most effective. If you aren't adding to market intelligence but just investing based on already-known financial data, you're essentially gambling.

No, you are putting more money into the pool --- for the people who do the data-finding to investigate and earn a share of.

I wasn't aware that amateur investing is done out of benevolence.

It does not need to. The invisible hand works much better with greed.

To my limited understanding, financial types on Wall St are not the ones providing the valuable services to which you are referring. It appears to the innocent bystander (if such a thing exists) that the Wall St Types (WSTs) are effectively trading in shares and futures for the purpose of making money primarily for their institutions. They then appear to get vast sums of money for being better, or luckier.

Yes, this is related to how well my investments do. Except that it isn't. I invest in companies that actually make things.

What I personally object to is people who confuse the word "bonus" with the word "entitlement". Bonuses should be awarded for people making things better for everyone.

But we all know the problems with measurements affecting processes. Perhaps the WSTs need to learn that lesson.

Really, now, is that all it takes? Well, then, we all know what to do from here on out.

There are a few issues here. When you get paid, that money probably gets deposited into a bank. When you start a family, you probably take out life insurance to make sure that if something happens to you, your family will be financially stable. When mortgage rates fall, you can refinance the mortgage on your house. Those are all financial services provided to you by private industry, and since people use them extensively, I think its fair to say that they are real contributions to the economy. Now you can argue that Wall St. guys are overpaid, have bad incentives, etc. But it is much tougher to argue that politicians should be arbitrarily limiting pay in certain currently-unpopular industries. That introduces distortions, and it does it at the worst possible time. Can you imagine if there were legal limits on startup profits in response to the dot com bubble? Do you think we'd have all of these great enterprises like Facebook, Twitter & YC? And the idea that it was done through a late night ammendment to the stimulus bill by an ethically challenged senator such that congressmen and congresswoman didn't even know that they were voting for these limits is just terrible.

Don't get me wrong: It is also terrible that for the last two decades a lot of our best engineers have gone into finance, rather than building cool stuff, but it sure looks like that is unwinding on its own.

Let's keep a sense of perspective here. The pay limits only apply to companies that accept government aid. He who pays the piper calls the tune; there's nothing wrong with that.

You also need to understand that these policies are set based on factors beyond pure economics. The various financial sector bailouts are hugely unpopular among US citizens. If ordinary people don't see bankers sharing some of the pain then we could actually see riots in the streets at some point. Look at what has already happened in some parts of Europe.

http://en.wikipedia.org/wiki/Finance

An interesting comparison about various industry contributions to the economy: the highly-debated $20 billion bailout for auto companies versus the quickly-resolved $800 billion bailout for financial companies.

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