GUEST COMMENT: A response to all those who would condemn traders and their bonuses

My only objection is that some (if not most) traders make their money through manipulating the market. I don't mind a trader making millions or anyone else for that matter, but they should do it honestly.

cont). the reinsurance industry and the damage it did to the Lloyds market and the names.

What is amazing is that the regulators, in spite of the fact that the US Comptroller of Currencies held Basel 2 back until Dec 2007, did not step in - at least to consider the nature of the profits posted by banks and whether, at least, regulatory capital was truly sufficient and able to support the corresponding economic activity. They should have seen that ther was incresing growth and questioned was what funding this and what was the true risk and the true required capital at this level. The solution would be to assign, risk then capital and the cost of capital which would have made booked profits more realistic and reduced bonusse considerably.

The other appaling matter is that transactions were being priced with models and curves that produce the number to allow the transaction and not reflect the risk the trade proposed, firstly, in itself, and then to the bank, and then the additional risk to the companies risk profile. None of this was being monitored by the regulator, in spite of risk departments being understaffed in relation to the number of trdes and thei complexities.

Let's follow the money. Staff are motivated to bonuses because that is what their line managers set them, who in turn are driven by their line managers and so it goes until you reach the Board. Here they have to satisfy their shareholders or they will sell off and buy better performing stock. Who are the stockholders, well pension funds and insurance companies make up a major portion. Why do they need performing shares? So that they can pay their policyholders (and bufferes and reserves to effect payout), especially those whose pay-outs increase with inflation or final salaries.

Yes, indeed people did take a lot of credit from the banks and the banks did price in default risk but they also (incorrectly) felt that they could distribute this risk away via securitisation. This was for some reason seen to be of infinite capacity so they could keep doing this. This drove interest rtes down, allowed companies to borow cheaply and increase economic activity. Then securitised paper started to be traded among banks, hedge funds, pension funds and insurers. Without going into the flawed maths of this to keep it simple, they seemed to have forgotten the experience of the re-insurance indu

To dd's comment.

The New Economic Foundation's research is flawed, if not questionable. They admit that they only use their in-house developed Social Reurn on Investment (SORI) partially.

The timeframes used are biased. The Investment banker is looked at only from the uppermost quartile and then only for 12 months, from 2008 to 2009, during the bleakest period. the contribution in periods before is not considered.

Whereas the nursery worker is looked at at an equivalent determined from a period of 20 years.

The SORI itself is a bit sorry. It looks at cost in ratio to a social return. Nothing is said about how social return is quantified. It does not say anything about marginal cost and marginal return.

It looks at direct and near-proximity, impact of the professions examined and not on the wider reality they influence, what they facillitate and contribute to. Most importantly, it completely dismisses economic rent.

The bankers still don't get it. No one- really cares if the traders earn lots of money as, as already mentioned, lots of others do too. Unfortunately what the public want is some of their money back. Those that have borrowed money should be paying it back from the profits they're earning now. If the traders don't like it, they can try to get new jobs as most other people do when their firms are bankrupt.
Those that didn't borrow money - they can do what they like with their profits.
Remember its relatively easy for an investment bank to make money on a rising market (the FT has risen over 40% in the last 6 months). The trick is to make money on a falling one - thats were the really good traders earn their money. Unfortunately history shows us that there are not many of them around even if they can watch 6 screens at once and talk 3 languages!!