>pay your risk guys a bit more so you hire the same calibre of individual that would otherwise end up on the trading/structuring/quant desks.

Reverse the causation here: they don't pay risk guys enough because they don't really care about the risks they are taking.

Because, you're right, if they cared they could solve issues like this tomorrow.

I think it can be chalked up to cost center vs profit center.

Staffing trading makes money.

Staffing risk costs money.

It's inevitable the latter is going to get the short end of the stick, probably the bare minimum requires to satisfy regulation, when salaries are allocated.

They do care about the risks they’re taking and invest a lot of money into risk management. But the real risk management is in buying politicians with campaign donations, lobbying, and revolving door jobs after they leave office. Favorable regulations, weak punishments, and bailouts are much more effective. Bank risk departments are just risk theater.

Exactly, I always like to remind myself of the New York State court cases that reaffirmed Compliance Officers are at-will employees, and can be fired for any reason, like raising compliance issues.

Some people are regulatory hires.

I agree but i this is still playing the same game, and it's the rules that need changing

There is a system set up which incentivizes your employees to screw over their own company, by taking more risk than they should, frontrunning their own clients, etc. And it necessitates setting up your own internal police (compliance, risk) just to make sure they don't get too out of hand.

There are personal incentives there for the IB people to try to outsmart and get something past risk, or avoid getting caught by compliance, not to try to do what's best for the company or their client

> and it's the rules that need changing

Why? The shareholders & execs were free to impose stricter compliance and risk rules. They chose not to.

As long as you don't have contagion spreading to the rest of the financial system then who cares. The new rules put into place re: bank capitalization after the GFC seem to have worked here. Shareholders & execs are taking the hit, the rest of the banking system doesn't seem to be affected, and everything seems to have worked as it's supposed to in this case.

the reporting on stress testing (that i've seen, at least) implies that added rules like further limiting bank capitalization fall woefully short of preventing another contagion from spreading.

i'm down for letting banks rise and fall on their own merits, but we've not had that since before the 80's at least.

We just went through the deepest, fastest recession since the 19th century. And not a single major financial institution failed or even needed a bailout.

That's pretty firm evidence that banks are more than adequately capitalized. People want to see everything through the lens of 2008, but the difference between banks then and now is night and day.

the circumstances are drastically different, so adequate capitalization is unlikely the reason for that. this was a induced recession from outside forces, not from internally correlated ones like 2008.

dont worry - the us will bail them out like we did in 2008 when they directly caused the housing market crash.

it's priced in at this point. there is no such thing as accountability in the finance industry anymore. Make bad decisions, get bailed out. All of them are moral hazards.

Not bailing them out would be ruinous for the economy, which therefore means they must be heavily regulated. This half-implemented system of privatized gains and socialized losses is not sustainable.

There are other alternatives between allowing the economy to collapse and bailing out Wall Street.

One proposed by a Harvard Professor during the GFC was to create an Economic Development Bank of the US, seed it with the TARP money instead ($700B), and give it the mandate of financing productive growth activities (as opposed to asset speculation or consumption). The money multiplier effect implies that $700B could multiply into $7T worth of liquidity injection into productive growth activities.

Another similar model is the Japanese post-WWII industrial development model, where a central bank or Ministry of Finance finances local regional banks as they support rebuilding and industrialization of their local economy. Google the economist Richard Werner for more on this model.

All this can be done while letting big Wall St. banks fail and taking them into receivership similar to the S&L crisis. There is precedent for all of this, it’s nothing new. And certainly more options than Wall St. self-servingly presents.

The entire model is balancing risk and reward. Being careful means you'll be eaten by your competitors, your shareholders will punish you and executive comp will take a hit - what is the point of playing the game then? Instead reward taking risks and if shit hits the fan, there are always heads that can roll (if need be), fines that can be negotiated with DOJ/SEC and ever-sneakier tactics can be invented to structure even more clever deals - it is all just normal part of doing business. The two execs that got fired would have been handsomely rewarded if Bill Hwang's bet went the right way, irrespective of the recklessness.

Yeah, but the "measure of recklessness" needs to go beyond just value at risk and portfolio sensitivities. Those things can be gamed by clever people and risk can be easily hidden.

Unfortunately, most risk managers I knew barely understood the theory enough to identify the hidden risks in the books they oversaw. Most even struggled to get the right data out of the systems to do their jobs properly!

You do make a valid point - if the recklessness somehow pays off, you're a hero (eg. Paulson).

Has anyone senior working at Credit Suisse lost any money here? There's your answer.

(Perhaps in hypothecated future gains in share options - but even there, maybe not.)

Yes, of course they have. How does a company losing a sum equal to nearly 2 years of profit not have the most dramatic impact on senior officials at said company? Where do you think the executive bonuses and value of shares (not just options, senior officials will already be vested) come from?

Beyond those losses, the head of investment banking and the head of risk were both fired yesterday.

The real problem is lower down the ranks, where someone on the trading floor can take outsized risk to boost their potential bonus, where worst case scenario they're fired without much ceremony and get another job somewhere else.

It's called the Bob Rubin trade. For years you stack up risk and profit immensely from it ($125 million). When things eventually blow up you simply... step away.

So sure, people were fired, but it's not like they are giving back all the money they made.

Principal-Agent problem, we meet again.

Lara Warner (Chief Risk Officer), was fired today, so I guess she's lost a fair bit.

Did any of the people fired have to pay back their bonuses? Will they be unable to walk into new jobs?

She's probably got a fairly sweet deal, and has already earned enough money to not need to worry too much about anything. The real hit is to her reputation, but it will make no material difference to what she can afford to have in life. I've seen plenty of disgraced bankers get hired in even more senior positions a few short months after their fall from power.