Wednesday, July 11, 2012

Claw Back is Justice to Unknowing Morons

JP Morgan will Claw Back executive compensation from "certain execs" because of a paper loss that the media has determined to be this incredible "A-HA!" moment. Acording to these morons: "It's the fair thing to do because they have too much money anyway..."
Has it occurred to the brain-trust in the media that incentive compensation is rarely in the form of a wheelbarrow full of money? I don't need to post all the wonderful methods of incentive compensation that are currently in practice, because - after all, CNBC and anyone else that sells News should be required to investigate before they pontificate.

Does CNBC realize that without all those "rich traders" their services may no longer continue to be required? I guess they'd need to hire more blonde's since nobody with a financial-pulse would continue to have an interest in their "product".

See the beautiful Stone Crab Claws in the picture. They are very expensive outside of Florida. They are quite yummy and  many a wall street themed steakhouse seafood tower is gloriously crowned with their presence. 
The crabbers don't kill the the crab in order to present you with a bouquet of crustacean goodness... no sir, they pluck one claw from the living crab and immediately return it to the sea to resume its life of eating stuff and producing offspring that will provide us with many succulent crab claws for generations to come... The harvested appendage eventually grows back. It is a harmless process and the crab becomes whole again, the crabber makes money, the restaurants get stocked, the waiter delivers the seafood tower, and the politician with his donors get to eat the fruit of the labors.

Think of the banker or the trader as the lowly stone crab. The opinion of the media and liberal politicians is to kill the crab in order to harvest both claws. They reason that because the crab retains one claw it has unfairly possessed this extra claw and should be punished. As a result crab stocks decline and entire businesses built around the Stone Crab wither away and die.


Tom said...

I was in the middle of writing a little rant on this topic myself when I say your draft going up (through the miracle of technology) and decided to comment on yours instead.

If Clawbacks are a good idea for Traders who make mistakes, then why not for journalists who make mistakes? God knows people have lost Billions listening to CNBC.
Why not force them to disgorge part of their pay?

The journalists are running this witch hunt so they feel like they're in a sweet position, or at least will for a while... until the mob starts after them as well.

How about clawbacks for congressmen? If their policy costs the taxpayer,s lets force them to pick up part of that cost?

ikaika said...

Tom - feel free to edit my post with your comments!

Chess said...

Tom...There you go again thinking with your brain and using common sense...
When CNN made the original bad call on Obamacare it had to cost someone an arm and a leg on the whipsaw in just Wellpoint and United alone.

Tom said...

Kind to say dude thanks. But let's keep authorship clear. Plenty of room for comments through the normal channels.

The truth of the 'clawback' is that it's a blatantly political phenomenon that has no real impact on incentives.

It's just a way to remind market participants who their bosses are, and to let the banks know that in the end it's Washington that decides who gets paid what and not some antiquated tradition like 'merit'.

Liberals are running the show now and for liberals, making things more political is a big plus, so that's the way it's going.

(How do you say "I didn't like the clawbacks" in Malay? That's what they speak in Singapore right? Malay?)

Oh reason in particular .... just asking.

ikaika said...

I believe they speak more Mandarin in SP than Maylay or Tamil... at one time their version of "Engrish" was becoming the lingua franca.

Side note - I read Sultan Knish blog today - must read!

frithguild said...

The clawback is nothing but the imposition of a constructive trust, which in English law has been around since the crusades.

For the Romans, clawback was the normal way. Under the Twelve Tables a citizen could take back property from any possessor, if title to it was obtained incorrectly by anybody in the chain. Likewise, the English picked up on the Twelve Tables spoliatus debet, ante omnia, restitui (Restitution should be made to the person robbed, before all others), which is in Blackstone.

For the Romans, breach of a fiduciary agreement could lead to being found infamis, which meant the lifetime incapability of taking part in any commercial actions.

Not sure if all this is relevant - just a thing we found on the internet that was interesting.

Chess said...

Ikaika...Nice find on that blog...Im not sure what the endpoint is??? They have been killing each other for centuries...
I used to think neutron bombs but then I realized they didnt really have much infrastructure I wanted to save... Something will be the final flashpoint for Isreal to have at em and hopefully we wil have a President that has some balls to unleash Hell upon them.
Unless your BHO--we and them will never play well together in the sandbox..

ikaika said...

even the use of the term "clawback" has been bastardized. I believe the rest of the Idiot "Me Too!" Press heard Cramer say it with authority, then they all had to use it because well ... Jim Cramer knows stuff...

I shake my head when ZeroHedge jumps on the "me too" bandwagon...

Clawback: lets say I worked on a trading desk that needed to use another department within my company to facilitate a trade.
if that other department spent money to assist my goal, they would either charge me up front as a "bolt-on" or "clawback" what they belive I owed them at the end of the month. Or in the case of my P&L requiring balancing, I would turn to other departments that utilized my services and "clawback" my dept share of the net commission.

The Idiot "Me Too" Press could have made matters simple and said "penalty" or "fine" which used to happen in the old days.
But no, they latched onto "clawback" and I'm sure some moronic politicians advised Dimon to do a "clawback" to convince the public...

the end result of "clawbacks" within a single corporate structure is like taking money out of your left pocket and putting it in your right pocket.

But how can that be? they took "money" (big asterisk here) from the bad traders!

no they took a number of restricted shares (that won't vest until 3 years from now) that were "priced" to yesterday's close.
These shares have zero value because they are worth zippo until they vest and are ultimately sold, and who knows what the realized value of these shares will be in 2015...

So Jamie Dimon clawed-back nothing from someone that probably said "good-riddence" to these damn LTRS.

Tom said...

Well it's nice to know they aren't making the law up as they go along, but the implication of wrongdoing is out of step with reality.

By most people's estimates, I'm very successful at managing money. My business is large and growing at a time when roughly 30% of the people I know have gone on to do other things instead.

My return is good but where I really shine is in my 'risk adjusted' return. I can't relay details, but I don't know anyone with a holding period as long as mine that's doing even half as well as I am.

With all that said, my "hit rate" (winning trades vs losing trades) is about 55%. Ikaika can tell you that 55% is not terrible. And yet 45% of my trades lose money.

So will my income be cut by 45%? If I worked in a bank it might. I admit that no one has gone there yet, but it is the logical end to this kind of policy.

Even worse, about 52% of my trades show a loss at some point during their existence. Do I get my income clawed back every time one of my trades dips into the red - even though it will eventually be profitable?

It's lunacy.

ikaika said...

55% is damn good!

chess said...

BHO gonna take your internet...God help us....Of course only if its an emergency.. I want to cry

frithguild said...

This is a completely new definition of this "clawback" term - looks to be a Dodd-Frank thingy.

The "clawback" example I am thinking of is a question of property law, like when partners who leave a dissolved firm bring unresolved cases to their new firms, the trustee for the old firm can "clawback" money those matters then generate belongs to the original firm.

So Dodd-Frank requires a clawback provision to be read into a private contract. NFIB v. Sebelius says that the commerce clause cannot authorize federal action based upon incaction.

Things that make you go hmmm....

Tom said...

Wall Street will react to Dodd-Frank the way they always react to legislative over-reach.... they'll engineer around it.

The entire derivatives industry only exists as a reaction to bad regulation of the past. It's how the game works.

The market does something the pols don't like so they make it illegal. Then the market (which is really just a reflection of reality, and it's reality that the pols have a problem with in the first place) finds a way to circumvent the letter of the law while meeting the same essential risk goal but with some other unintended consequences.

The pols don't like those (and don't understand the rest) so they make the unintended consequences illegal. But not all of them were bad for the bankers, so they engineer around those laws too.

And on and on it goes. The pols think they're being proactive and getting things 'under control' when they're really just chasing their tails, the bankers say they're supporting the free market when they're really just gaming the system to benefit themselves, and the market is distilling and distorting risks, but not eliminating any of them.

Ashes, ashes, we all fall down.

frithguild said...

That is exactly the point I was thinking of as I diverted into Roman law. The names of the deeds change, because we always find a way to avoid the consequences of a bad law - so it goes back much farther than the black death (ashes, ashes). The more complex the law, the more porous it is.