bonus culture

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pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks

We need to return Wall Street to its days of prudent risk taking, where the leaders of the firms are held personally accountable for their bad behavior or foolish risk taking. That accountability, which used to be a given in the days when Wall Street was a series of undercapitalized private partnerships, has been totally lost in the modern era, when Wall Street has been transformed into behemoth public companies chock-full of other people’s money and when a bonus culture has replaced the partnership culture. It’s been said the three most dangerous words in the English language are “other people’s money.” We need to restore that accountability, and fast. If a banker or trader creates and sells a squirrelly financial product or makes a terrible and risky bet knowing full well when he or she did it that it was likely to go wrong, then there is little question, if convicted, that the expensive art should be sold off the walls in his or her home and that the home itself should be sold and the proceeds given to the victims.

If DLJ were successful, if the public’s capital could be substituted for partners’ capital, if the public’s legal liability for mistakes could be substituted for the partners’ legal liability for mistakes, there would be no telling what the consequences would be both for Wall Street and for everybody who relied on Wall Street to raise capital, to provide liquidity in the buying and selling of stocks and bonds, and to help individuals manage and grow their wealth. Although it was unlikely the founders of DLJ could have anticipated all of what its IPO would unleash over the next nearly fifty years, they must have had some inkling that by substituting a bonus culture—where bankers, traders, and executives demand to be paid for the revenue they generated in their various product lines—for the long-standing partnership culture—where the individual partners of the firm collaborated to make sure only prudent risks were taken in order to ensure there would be annual pretax profits for them to divide—Wall Street would never be the same. And the behavior of Wall Street bankers, traders, and executives since 1970 as one firm after another followed DLJ’s lead, has proved unequivocally that neither Wall Street nor much of the world’s economy would be left unchanged.

Someone who still has $600 million in cash lying around is unlikely to be nearly as upset as someone who had nothing remaining of a $1.6 billion fortune. It’s like the difference between a chicken and a pig in a ham and egg breakfast: The chicken is interested; the pig is committed. The leaders of Wall Street’s banks need to be totally committed to their firms, not just merely interested. We need to eliminate the bonus culture on Wall Street and return to a compensation system that more closely resembles that of the partnership culture from the years before DLJ filed its IPO in 1969. It wouldn’t be hard to do, either. It just requires the leadership of a Wall Street firm to want to make the change. Unfortunately, gutsy leadership is in short supply on Wall Street these days. And while Senator Warren won’t like to hear this, “bigger” is not an inherently bad thing to be when it comes to finance.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

This expectation operated in one direction only: they did not plan to share losses and indeed generally had no capacity to do so. The award by a French court of €4.9 billion against ‘rogue trader’ Jérôme Kerviel – compensation for the losses his inept trading had supposedly inflicted on BNP Paribas – had symbolic significance only. The bonus culture spread throughout financial conglomerates. Even very junior employees in retail banks found themselves chasing aggressive targets to earn bonuses – which would in due course give rise to well-founded claims that products such as mortgages and payment protection insurance had been mis-sold. The bonus culture, and a much-increased level of expectations about pay, spilled over into the rest of the corporate sector. Senior executives of large businesses – often, like Sandy Weill, themselves engaged in deal-making in the new market for corporate control – observed the levels of remuneration being earned in the financial sector, and raised their sights.

The option allowed beneficiaries to participate in the upside but did not require them to share in the downside, a structure that encouraged the risky transformational change that proved so destructive of ICI, GEC and Citibank: the link to share prices – Weill’s ‘nearby computer monitor displaying Citigroup’s changing share price’ – created an intensely short-term focus. What useful business information could a chief executive glean from minute-by-minute fluctuations in the value of the company he ran? The bonus culture in both financial and non-financial sectors, far from aligning the interests of managers and traders with those of shareholders, produced an outcome in which the objectives of managers and traders were materially different from those of the organisations for which they worked. This agency problem – companies being run for the benefit of a group of senior employees – was most acute in the financial sector but also infected the corporate sector more widely.

Rockefeller and Andrew Carnegie, and the influential industrialist–financiers of the emerging markets of the late twentieth century, such as Mexico’s Carlos Slim and India’s Dhirubhai Ambani, or the men who have made fortunes from the appropriation of formerly stateowned properties in eastern Europe. But the arrival of corporation men such as Welch among the super-rich is a new phenomenon. The ability of the senior employees of large corporations to appropriate significant fractions of corporate revenues for their own purposes mirrors, perhaps, the lavish lifestyle opportunities once exploited by prelates and courtiers. And so the combination of the bonus culture in the financial sector and its associated activities, a new generation of robber baron and the multimillionaire CEO has produced a reversal of the egalitarian trends of most of the twentieth century. ‘We are the 99 per cent’ was the slogan of the ‘Occupy’ protesters, drawing attention to the degree to which a small minority have benefited disproportionately during the era of financialisation.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

After the 2008 crisis, the Center for the Study 147 148 Chapter 7 |  Reconstructing Finance of Financial Innovation in London published a very entertaining online book called Grumpy Old Bankers, in which bankers of an earlier era representing many countries opined on how the current generation “lost the plot” and disgraced the profession. Short-term share-price manipulation through leverage and asset securitization is high among their complaints. The Bonus Trap The first bank to openly abandon the “bonus culture” of compensation based upon meeting share-price targets will gain enormous moral capital and legitimacy. Even if initially recognized dimly by the general public, its peers, customers, and shareholders will take notice. As personally greedy as individuals at the top of such institutions may or may not be, the current model of compensation is a nightmare for all large banks. Employees in key market-facing roles may not be talent in the sports-star sense, but they all behave like free agents.

To take out capital, partners were required to make a personal application to Morgan himself. Old-line Wall Street partnerships, such as Goldman Sachs before it went public in 1999, were essentially the same, as were professional services firms such as McKinsey and “white shoe” law firms. Broken Markets Download from Wow! eBook <www.wowebook.com> Would the “talent” stand for abandoning the bonus culture and stock-based compensation? Even absent the looming threat of government pay policies in the United Kingdom and elsewhere, there is wide recognition that the current model cannot be sustained. The brutal fact of the matter is that good-quality professional management training—from formal settings such as MBA schools to apprenticeships in analyst programs at consulting firms and investment banks—has never been as widely available as it is today.

., 139 Finance-driven economy, 1, 72 anti-capitalism, 2 capitalism, 1 chronic debt crisis, 22 corporate America, 20 current movie artificial bank earnings, 7 asset prices, 6 banking implosions, 6 borrowers and investors connection, 10 borrowing demand, 7 catastrophic financial bubble, 10 civilization, 10 corporatism, 9 democratic crony capitalism, 9 Dodd-Frank act, 8 economic growth and social stability, 10 financial repression, 9 Glass-Steagall Act, 8 human ingenuity, 10 interbank funding markets, 6 low interest rates and easy money, 6 market collapse, 10 money market, 6 overexuberence, 6 overinvestment and speculation, 6 pre-crisis conditions, 8 printing money, 7 private capital, 7 167 168 Index Finance-driven economy (continued) profitability, 7 quantitative easing, 8 recovery, 8 regulation, 8 regulatory capital rules, 8 resources and tools, 9 shell-shocked enterprises and households, 8 end of employment, 21–22 financial leverage magic and poison CEO class, 14–15 consumer debt, 15–16 disconnection problem, 11–12 market bargain, 10 real economy, 10 wealth financialization, 13–14 working capital, 11 global financial crisis, 2 Great Moderation, 16–18 Great Panic, 18–19 household sector agony, 19–20 investor class, 22 Marx, Karl asset bubble, 5 cash nexus, 4 dot-com bubble, 5 economic revolution, 3 First World War, 4 free markets, 3 French Revolution, 3 globalization, 3 Great Depression, 5 liberalism, 3 normalcy, 4 overproduction and speculation, 3 Wall Street, 4, 5 revolutionary socialism, 2 sovereign debt, 8, 22 Finance reconstruction, 142 bank bashing, 146 “bankers”, 142 business model, challenges, 145 Citigroup, 145 cyclical businesses, 143 government management, 142 legitimacy bonus culture, 148–150 privileged opportunity, longestablished bank, 146 short-term share-price manipulation, 148 state and legal systems, 147 stock price, 147 mark-to-market price, 144 “producers”, 143 profession, definition, 163 prudence, 145, 161–163 root-and-branch transformation, 145 talent pool, 144 “the race for talent”, 143 trust cash management, 160 Financial Market Meltdown, 159 FSA, 159 hackneyed term, 159 information asymmetry, 159 non-bank financial service provider, 161 oversold/up-sold products, 159 utility Anglo-Saxon-type banking systems, 156 big data tools, 158 bills-of-exchange market, 150 branch and payment services, 157 clearinghouse creation, 158 core banking, 154 economic value transmission, 150 exchange of claims, 151 fee-income growth, 155 fiat money system, 151 financial intermediation, 150 financial transactions, 157 flexible contractor/subcontractor relationship, 158 information technology, 156 “liquidity premium”, 152 multidivisional/M-form organization, 153 non-interest income, 155 old-media companies, 157 Index overhead value analysis, 154 “privileged opportunity”, 152 quill pen–era practice, 158 sheer utility value, 155 silos, product business, 153 transaction accounts, 152 venture capital industry, 142 “War for Talent”, 143 Financial crises, 23 affordable housing, 24 banking “transmission” mechanism, 43 Basel III process, 50–51 basel process, 27–28 consumer banking(see Consumer banking) Dodd-Frank, 49–50 domestic banking system, 38 European Union, 51–53 FDIC, 40 finance-driven economy’s leverage machine, 43 Financial Market Meltdown, 25 GDP, 38 Government Policy and Central Banks, market meltdown(see Regulation process) government policy failure, 45 “government-sponsored” public companies, 24 Great Depression, 44 GSEs, 24 legal missteps, 47–48 New Deal, 43 panic-stricken markets, 40 political missteps, 45–47 Ponzi scheme, 42 postwar financial order, 25–27 printing money, 38 private profits and socialized losses, 40 private-sector demand, 43 public-sector demand, 42 quantitative approach, 25 TARP, 39 too-big-to-fail institutions, 41 Triple A bonds, 41 US Federal Reserve System, 38 Financial liberalization, 89 Financial Market Meltdown, 25, 61, 89, 109, 159 Financial repression, 9, 78, 111 Financial Services Authority (FSA), 60, 159 Food and Drug Administration (FDA), 69 Fordism, 68 Free-market capitalism, 89 Free markets, 3 French Revolution, 3 Front-end trading systems, 107 FSA.See Financial Services Authority G GDP, 11 “Giro” payments systems, 151 Global imbalance, 96 Globalization, 3 Global whirlwinds, 93 Asia, finance movement cultural differences, 110–111 Financial Market Meltdown, 109 Interest Equalization Tax, 109 language, law, and business culture, 109 primacy, 109 austerity(see Austerity) British Empire, 30 Chimerica, 97 China and United States cross-Pacific economy, 97 foreign interference and aggression, 98 headline growth rates, 97 repression revolution and series, 97–98 Second World War, 98 Smoot-Hawley Tariff, 98 surpluse trade, 97 sustainable development, 98 Chinese ascendancy, 113 clearing and settlement bottleneck, 106–107 Dynastic China, 112 169 Download from Wow!


pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

After I had settled on those numbers, senior management came in and cut all bonuses by 20 per cent. Headquarters took off another 15 per cent. The following year I added 40 per cent over what I thought reasonable and that’s how it played out. By cutting bonuses senior management proves to headquarters they have the bank’s interest at heart – while probably leaving more for the top. Headquarters must be seen by shareholders to be doing the same.’ The bonus culture is a ritual on many levels. ‘The pre-positioning starts in September to October. People fly their kite, signalling to their boss: “Look how well I have done over the past year”; “Remember the account that went so well, I was on board.” When a big deal is announced, people try to get their names mentioned. We call that “revenue tourism”. Meanwhile management is pushing back: this year is not going to be the big one.

A junior dealmaker who had left his bank on his own initiative remembered how colleagues were always on the phone making reservations: ‘Table for four here, table for six there. The restaurant business in London must love bankers. Some guys would come in on Mondays with the bills from the weekend. Dropping £1,000 on a night out was not surprising.’ Kilian Wawoe was a senior human resources officer in the asset management division of ABN Amro in the Netherlands and Monaco before writing a very critical book about the bonus culture and moving into academia. He had flown business class a lot and this had a peculiar effect on him. ‘Over there, a line of sweaty people and you walk past all that, with your platinum card. Have you noticed that people in business class are far more likely to look at passengers making their way to economy? They want to be seen to be sitting in business class. I never catch people in the first rows of economy doing that.’

Back then he never thought he was stressed because being successful in finance requires you to hide your anxiety. First from others and over time, from yourself. What’s more, he said, ‘There just wasn’t any time for self-reflection. I ended up drinking huge amounts. Alcohol is a quick mood changer; it stops you from thinking and dulls you down. Not that I was aware of that at the time.’ I remained quiet, waiting for him to break the silence. This isn’t just due to the bonus culture, he said in a tone that suggested he had thought about this a lot. ‘This is about tribal bonding, about belonging and sticking with your mates. Your sense of worth begins to be formed by what you do. It is often the first question people ask you, right? What do you do? In that time, when I answered that question, I was a superstar.’ Going public with something he believed to be wrong would have meant placing himself ‘in one stroke’ outside of that world.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

The excess relative wage—the difference between average finance wages and what one would predict based on educational differences—reaches a peak of around 40 percentage points in the 2000s. See Figure 11 in ibid. 78. Andrew Cuomo, “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture,” July 2009, available at “Cuomo Report Details Wall St. Bonuses,” DealBook Blog, The New York Times, available at http://dealbook.blogs.nytimes.com/2009/07/30/cuomo-report-blasts-wall-street-bonus-culture/. 79. Claudia Goldin and Lawrence F. Katz, “Transitions: Career and Family Life Cycles of the Educational Elite,” American Economic Review: Papers and Proceedings 98 (2008): 363–69. 80. Steve Lohr, “Wall St. Pay Is Cyclical. Guess Where We Are Now,” The New York Times, February 4, 2009, available at http://www.nytimes.com/2009/02/05/business/05bonus.html. 81.

As the bank’s president, Gary Cohn, said in August 2009, “Our risk appetite continues to grow year on year, quarter on quarter, as our balance sheet and liquidity continue to grow.”70 And Goldman’s value-at-risk—a quantitative measure of the amount it stood to lose on a given day—after dipping slightly in summer 2008, continued to climb throughout the crisis to levels in 2009 five times as high as in 2002.71 However, the clearest indication that Wall Street was back to business as usual was the amount of money earmarked for bonuses. In the first half of 2009, Goldman Sachs set aside $11.4 billion for employee compensation—an annual rate of over $750,000 per employee and near the record levels of the boom. Even if the government’s strategy was to let the banks earn their way out of their problems, that strategy was being undermined by a bonus culture that diverted the excess profits to employees rather than to capital reserves. High risk and huge payouts—nothing changed, except a strengthened government guarantee. Defending the huge bonuses in St. Paul’s Cathedral in London in October 2009, Goldman Sachs executive Brian Griffiths went Gordon Gekko one better by invoking Jesus: “The injunction of Jesus to love others as ourselves is a recognition of self-interest.… We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”72 Goldman CEO Lloyd Blankfein even claimed to be “doing God’s work” (because banks raise money for companies who employ people and make things).73 The rest of us were not so lucky.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

It spread to the public sector too, partly as a genuine response forced by competition for able people in the job market but partly just because of the example set by banks and other companies that were being feted by politicians and the media. It has been corrosive. Bankers have even started to act as though, despite their enormous bailouts from taxpayers, they can get straight back to the high salary and high bonus culture. They seem to have an extraordinary psychological blind spot about the moral outrage their excessive incomes have caused. But their Gilded Age is over. Whether it will be a calm or a turbulent end is yet to be seen. FIVE Trust On wednesday 10 september 2008, Lehman Brothers was worth about $5 billion on the New York Stock Exchange. Its shares had lost three quarters of their value during the year, so that valuation was already much lower than the $60 billion it had been worth in early 2007.

However, the key point about the reform of big finance for my current argument is the impact such high incomes in banking have had on the rest of society. The bonuses far in excess of salaries, and the spending on big houses, fast cars, and designer clothes they funded, did create a climate of greed. People in other professions who are in reality in the top 1 percent or even 0.1 percent of the income distribution were made to feel poor by the bankers.4 Banking bonus culture validated making a lot of money as a life and career goal. It made executives working in other jobs, including not only big corporations but the public sector too, believe that they deserved bonuses. Remuneration consultants, a small parasitic group providing a fig leaf justification for high salaries, helped ratchet up the pay and bonus levels throughout the economy. The whole merry-go-round of bonuses and performance-related pay is a sham.

Courtesy of Shutterstock. 259 INDEX Addams, Jane, 131 AEG Live, 197 Affluent Society, The (Galbraith), 190, 230–31 aging population: baby boom generation and, 4, 106, 109; demographic implosion and, 95–100; measurement and, 206; policy recommendations for, 267, 280, 287, 296; posterity and, 89–90, 94–95, 105–6, 109, 112–13; retirement age and, 94, 97–99, 106–7, 112 Alesina, Alberto, 128, 135–36, 171 All Consuming: How Shopping Got Us into This Mess and How We Can Find Our Way Out (Lawson), 26 altruism, 48, 118–22 André, Carl, 27 anomie, 48, 51 anxiety, 1, 25, 47–48, 136–38, 149, 174 Aristotle, 50 Arrow, Kenneth, 81–82, 220, 236–37, 310n25 Arthur Anderson, 145 asymmetric information, 17; institutions and, 248, 254, 262–63; measurement and, 186; values and, 214, 219–20, 229 Australia, 12, 271; Bureau of Statistics and, 274; diversity and, 172; fairness and, 126, 130, 143; measurement and, 188, 202, 206–7; time surveys and, 206–8; trust and, 140 Austria, 239 Axelrod, Robert, 118–19 baby boom generation, 4, 106, 109 bailouts: banks and, 1, 88, 91, 99–100, 145, 267; stimulus packages and, 91, 100–3, 111 Bank of England, 1–2, 174 bankruptcy, 289; Lehman Brothers and, 1, 85, 87–88, 145, 211, 275–76; Northern Rock and, 1, 146; posterity and, 87; trust and, 145–46 banks, 2; bailouts and, 1, 88, 91, 99–100, 145, 267; Baker on, 244; bonus culture of, 87–88, 115, 139, 143–44, 193, 221, 223, 277–78, 295; capital reduction and, 256; competition and, 277; Economy of Enough and, 22, 28; fairness and, 115, 133, 139, 143–44; flaunting of wealth by, 277; Gilded Age of, 144; greed and, 277–78; higher capital requirements for, 277; immorality of, 90, 277–78; interconnected network of, 277–78; interest rates and, 281, 283; lobbyists of, 87–88, 276; measurement and, 193, 200; needed policy recommendations for, 277–78; politicians and, 87–88, 286; posterity issues and, 85–91, 94, 99–102; recovery and, 3, 103; reform and, 277–79, 283, 296; regulation of, 7; runs on, 1; state–owned, 252; structural fragility of, 6; trust and, 88–89, 145–50, 158, 161–64, 174, 176, 257; values and, 211, 213, 217, 223, 226–28, 233 “Battle for Seattle” riot, 211 Baumol, William, 189–94, 206–7 BBC, 226, 247, 288 behavioral economics, 282; fairness and, 116–17, 121; rational choice theory and, 214–15.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

The move all across the corporate sector in the English-speaking world towards equity-related bonuses and performance-related pay encouraged a new level of greed among top executives. Continuing revelations of unethical and criminal behaviour since the financial crisis suggest that the stock of moral capital has fallen to a much lower level than has prevailed in recent decades. The facts that so many big institutions were the subject of morally hazardous bailouts and so few people have gone to jail in the wake of the crisis, along with the persistence of the bonus culture in banking and in the wider corporate sector, mean that the improvement in commercial morality that Galbraith expected to take place in downturns did not happen to the extent it should have during the Great Recession. Despite the protestations of bankers that they are embracing an ethical approach to running the business, little appears to have changed. In the cumbersome bureaucracies of the international banking world it is unbelievably difficult to change a culture that has become so heavily infected by greed.

The banker Carl Fürstenberg, who ran the Berliner Handels-Gesellschaft in the late nineteenth and early twentieth centuries, famously remarked: ‘Shareholders are stupid and impertinent – stupid because they give their money to somebody else without any effective control over what this person is doing with it, and impertinent because they ask for a dividend as a reward for their stupidity.’217 Fürstenburg’s first point is relevant to the wider corporate sector today because there is another sense in which quoted companies in the Anglosphere have become dysfunctional. The bonus culture that has come to dominate top pay over the past ten to fifteen years was supposed to help align the interests of management with those of shareholders. Instead, it has introduced systematically distorted incentives into the corporate world. Rewards increasingly take the form of shares or share options and are performance related. The benchmarks for performance are crude measures such as earnings per share, return on equity, or total shareholder return, which consists of capital gains plus dividends paid out over a given period.

Wilson) 1, 2 Alberti, Leon Battista 1 Alessandri, Piergiorgio 1 Allen, Maurice 1 Ambassadors, The (Henry James) 1 Americans for Tax Reform 1 Anatomy of Change-Alley (Daniel Defoe) 1 Angell, Norman 1 Anglosphere 1, 2 Arab Spring 1 Aramaic 1 arbitrage 1 Argentina 1 Aristotle 1, 2, 3, 4, 5, 6, 7, 8, 9 art 1 Asian Tiger economies 1 Atlas Shrugged (Ayn Rand) 1 Austen, Jane 1 Austrian school 1 aviation 1 Babbitt (Sinclair Lewis) 1 Bair, Sheila 1 Balloon Dog (Orange) (sculpture) 1 Balzac 1 Bank for International Settlements 1, 2, 3, 4, 5, 6 Bank of England 1, 2, 3, 4, 5 bank runs 1 bankers 1, 2 bankruptcy laws 1, 2 Banks, Joseph 1 Banksy 1 Barbon, Nicholas 1, 2, 3 Bardi family 1 Barings 1 Baruch, Bernard 1, 2 base metal, transmutation into gold 1 Basel regulatory regime 1, 2, 3 Baudelaire, Charles 1 Baum, Frank 1 behavioural finance 1 Belgium 1, 2 Bell, Alexander Graham 1 Benjamin, Walter 1 Bernanke, Ben 1, 2, 3 Bi Sheng 1 Bible 1 bimetallism 1 Bismarck, Otto von 1 Black Monday (1987) 1 black swans 1 Blake William 1, 2, 3 Bloch, Marcel 1 Bloomsbury group 1, 2 Boccaccio 1 bond market 1 bonus culture 1 Bootle, Roger 1 Boston Tea Party 1 Boswell, James 1 Boulton, Matthew 1 Bowra, Maurice 1 Brandeis, Louis 1 Bretton Woods conference 1 British Land (property company) 1 British Rail pension fund 1 Brookhart, Smith 1, 2 Brunner, Karl 1 Bryan, William Jennings 1 Bubble Act (Britain 1720) 1 bubbles 1, 2, 3 Buchanan, James 1 Buffett, Warren 1, 2, 3 Buiter, Willem 1 Burdett, Francis 1 van Buren, Martin 1 Burke, Edmund 1, 2 Burns, Robert 1 Bush, George W. 1, 2 Butler, Samuel 1 Candide (Voltaire) 1 Carlyle, Thomas 1, 2, 3 Carnegie, Andrew 1 Carville, James 1 cash nexus 1 Cash Nexus, The (Niall Ferguson) 1 Cassel, Ernest 1, 2 Catholic Church 1, 2, 3 Cecchetti, Stephen 1 Centre for the Study of Capital Market Dysfunctionality, (London School of Economics) 1 central bankers 1 Cervantes 1 Chamberlain, Joseph 1 Chancellor, Edward 1 Chapter 11 bankruptcy 1 Charles I of England 1, 2 Charles II of England 1 Chaucer 1 Cheney, Dick 1 Chernow, Ron 1 Chicago school 1, 2 Child & Co. 1 China 1, 2 American dependence on 1, 2 industrialisation 1, 2, 3 manufacturing 1 paper currency 1 Christianity 1, 2, 3, 4, 5 Churchill, Winston 1 Cicero 1, 2 Citizens United case 1 Cleveland, Grover 1 Clyde, Lord (British judge) 1 Cobden, Richard 1, 2, 3, 4 Coggan, Philip 1 Cohen, Steven 1 Colbert, Jean-Baptiste 1, 2 Cold War 1 Columbus, Christopher 1 commodity futures 1 Companies Act (Britain 1862) 1 Condition of the Working Class in England (Engels) 1 Confucianism 1, 2, 3 conquistadores 1 Constitution of Liberty, The (Friedrich Hayek) 1 Coolidge, Calvin 1, 2, 3 Cooper, Robert 1 copyright 1 Cort, Cornelis 1 Cosimo the Elder 1 crash of 1907 1 crash of 1929 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 creative destruction 1, 2 credit crunch (2007) 1, 2, 3 cum privilegio 1 Cyprus 1, 2 Dale, Richard 1, 2 Dante 1 Darwin, Erasmus 1 Das Kapital (Karl Marx) 1 Dassault, Marcel 1 Daunton, Martin 1 Davenant, Charles 1, 2, 3 Davies, Howard 1 debt 1 debt slavery 1 Decameron (Boccaccio) 1 Defoe, Daniel 1, 2, 3, 4, 5, 6, 7, 8 Dell, Michael 1 Deng Xiaoping 1, 2 derivatives 1 Deserted Village, The (Oliver Goldsmith) 1, 2, 3 Devil Take the Hindmost (Edward Chancellor) 1 Dickens, Charles 1, 2, 3, 4, 5, 6, 7, 8, 9 portentously named companies 1 Die Juden und das Wirtschaftsleben (Werner Sombart) 1 A Discourse of Trade (Nicholas Barbon) 1 Ding Gang 1 direct taxes 1, 2 Discorsi (Machiavelli) 1 diversification 1 Dodd–Frank Act (US 2010) 1, 2, 3 ‘dog and frisbee’ speech 1 dot.com bubble 1, 2, 3, 4 Drayton, Harley 1 Dumas, Charles 1, 2 Dürer, Albrecht 1 Duret, Théodore 1, 2 Dutch East India Company 1 Duttweiler, Gottlieb 1 Dye, Tony 1 East of Eden (film version) 1 Economic Consequences of the Peace (Keynes) 1, 2 Edison, Thomas 1, 2 efficient market hypothesis 1 electricity 1 Eliot, T.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

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Airbnb, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, Edward Snowden, falling living standards, future of work, G4S, greed is good, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, Ronald Coase, shareholder value, sharing economy, Skype, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

The difference is that the new wealth is owned and earned, not by the landowners of old, but by the ‘working rich’, mainly the top executives of corporate firms, along with a few bankers and the occasional sports star, who together make up just .01 per cent of the population. Piketty calls this situation ‘meritocratic extremism’. That is a polite term for excessive greed. I have never seen the sense of the bonus culture. To me it seems demeaning to have to be bribed to do your best in your job. When I worked in one of the corporate elephants it was assumed that your salary was the appropriate rate for your work and you were expected to do it to the best of your ability. Success was eventually rewarded by promotion and, with it, an increased salary. It becomes absurd when some bonuses are guaranteed or, if not guaranteed, have become so much the norm that they are part of the implied contract.

The money is nice but not the point. It is when money becomes the point that something goes wrong. As I have argued in Essay 7 it was the new, and mistaken, priority given to shareholder value in the 1970s that made money the main point of business, leading to the share options and bonuses which distorted the priorities of the managers, and to the harmful emphasis on the short term. The replacement of the bonus culture by profit-sharing, and share-option schemes by wider share ownership, would turn things around. Money would be the prize but not the point. There is a difference. Ask any prize-winner, be they Nobel or gold medallist. Nevertheless, as it is, the recipients of the high pay awards see these as the fruits of enterprise, well deserved and just. Without such high compensation they would not be able to accumulate capital, which, they feel, would be unfair.


Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

When Bear Stearns collapsed in March 2008, Cayne’s 2006 stock bonus had fallen to a meager 6 percent of its original value, and his 2006 option bonus expired, worthless. This is exactly how Wall Street bonus culture is intended to work. However, Murphy’s conclusion comes with an important caveat. His results only apply to the top level of banking executives—they don’t translate to other employees. Lower-level employees with lower levels of wealth also had much less to lose from risk-taking. The financial penalties that matter to a high net worth individual may not matter to someone with little wealth or stake in a company. Did low-level employees of financial firms take excessive risks in pursuit of potential profit? As we’ve seen with rogue traders, the Wall Street bonus culture isn’t sufficient to prevent low-level employees from taking excessive risk; other forms of monitoring and risk management are needed.

As we’ve seen with rogue traders, the Wall Street bonus culture isn’t sufficient to prevent low-level employees from taking excessive risk; other forms of monitoring and risk management are needed. Here is a possible counternarrative, but one that will require further evidence to verify or refute. Despite its inaccuracy, this narrative about Wall Street’s bonus culture is difficult to dislodge from people’s minds, precisely because it conforms to people’s heuristic about how the world works. We’re prone to confirmation bias. If we believe that Wall Street wheeler-dealers are all crooks, this narrative about Wall Street’s bonus culture not only 306 • Chapter 9 confirms this heuristic, but also reinforces it. More subtly, if we believe that “people respond to incentives”—the economist’s heuristic—we’ll be satisfied with an explanation that confirms this heuristic without ever bothering to dig deeper into the details to check whether our heuristic has been applied correctly.

We should strive to entertain as many interpretations of the same set of objective facts as we can and hope that a more nuanced and internally consistent understanding of the crisis emerges in the fullness of time. Some narratives are mistaken, incorrect, or deliberately untrue. Where facts can be verified or refuted, we should do so expeditiously and relentlessly. Here are two examples of popular narratives that may not be as accurate as they sound. NOT ENOUGH SKIN IN THE GAME? One popular narrative of the financial crisis blames the “bonus culture” of Wall Street for creating a climate of excessive risk-taking. Much of the public was outraged that executives in the financial industry received generous bonuses after the world came to the brink of financial ruin. Why was the U.S. government bailing out the banks, if the money was immediately going into the wallets of the people whose risky decision making caused the crisis? Many people in the heat of the moment believed that Wall Street had engineered the financial crisis to “privatize the gains and socialize the losses,” but cooler heads agreed that the executives were naturally responding to financial incentives that caused them to take undue risk.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

Their response has been to increase the number of licensed brokers—so-called registered reps—selling securities to the public. The value of a broker to an investment bank is simply to make more trades happen and get clients to put more money into the firm. Brokers only survive by being ‘‘producers,’’ meaning they get clients to trade as much as possible. This is probably not a good idea for most of us, but it is how brokers hang on to their jobs and get paid a bonus. The Bonus Culture Two points now need to be underlined. Most investment bank pay is bonus, just like many sales jobs. Think of David Mamet’s Glengarry, Glen Ross or Danny DeVito in Tin Men, and you have the picture. Second, the investment banking model is by its very nature riddled with conflicts between what is good for the bank and what is good for the client. The customer always comes second. Besides buying and selling securities for their customers, ‘‘broker dealers’’ have a second way of making money.

See also Discount Houses bills of exchange, 32–35, 37–39, 77, 82–84, 87, 94–95, 105, 121 Bill of Exchange Act of 1882, 119 BIS (Bank for International Settlements), 108. See also Basle Committee black swans, 69 balance sheet lending, 36, 90 ‘‘bonds,’’ xi, xiv, 7, 17, 20, 25, 42–43, 49, 51–55, 64–67, 73, 78, 82, 87–88, 93, 106–107, 142, 151; coupons, 43–45; pricing, 44–46; trading, 45; vs. stocks, 48 bonus culture, 21 booms and bubbles, xx, 3, 17–18, 27, 46, 63, 67, 98, 109, 114, 126, 131, 137, 145, 149, 153, 157, 165, 175 borrowing, xix, 2, 4–5, 41, 56, 62, 66, 71, 79, 112–114, 146, 149, 151, 154, 161, 165, 169, 175 branch banking, 89 Bretton Woods, 115, 154–155 broker, 19–28, 46, 82, 87, 89–91, 96, 107, 110, 120, 130, 142, 159, 176 Building and Loan. See S&L Buffett, Warren, 48, 52, 175 Busts, xv, xx, 16, 18, 27, 67, 80, 98, 104, 121–131, 139–140, 158, 170 buy side, 22–27, 46, 67, 68, 146 ‘‘capital,’’ 4–5, 16, 26–28, 41, 46, 54, 60, 64, 66, 68, 70–74, 93, 99, 103–104, 117, 127, 142–143, 148, 156–160, 165, 184, 189 capital market, 27, 60, 117, 156, 160, 189 CD (Certificate of Deposit), 39, 49, 71, 130, 145–146 CDO (Collateralized Debt Obligation), 73–74 CDS (Credit Default Swap), 73 central bank, 12–13, 69, 74, 83, 102–113, 122–123, 136, 150, 160, 162–165, 173, 185.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

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Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

His understanding of the business was unparalleled. But he had some blind spots. Alphin knew Thain well enough to understand that the incessant conversations they had about money, about compensation, had nothing to do with greed. John Thain was not a greedy person. He was a dedicated family man who put his wife and kids before everything else. Alphin came to view Thain’s focus on money as symptomatic of Wall Street’s out-of-control bonus culture. Taken in narrow terms, Thain was right to ask for a certain level of compensation. But nobody in New York seemed to understand the bigger picture. Alphin didn’t go to an Ivy League school, and he wasn’t even the top student at the school he did attend, but he understood a few things about Wall Street. The whole reason everything almost came crashing down in 2008 was twenty-five years of nonstop focus on bonus checks, on compensation.

Because O’Neal let his guys run wild in the CDO market so they all could get bigger bonuses. Bank of America could never have bought Merrill Lynch if the people up there hadn’t been so obsessed with their own bonuses that they were blind to the dangers of what they were doing. The people at Merrill Lynch came crawling to Charlotte because of their own self-inflicted wounds. The whole reason John Thain worked for Ken Lewis, and not the other way around, was that bonus culture they had up there in New York. And even Thain, with all his degrees from Harvard and MIT, couldn’t see it. That’s what twenty-five years on Wall Street would do to a man. FROM JANUARY 12 TO 14, Bank of America’s share price slipped, in heavy trading, from just under $13 a share to just over $10, amid general uncertainty over the economy and the impending shift of power in the White House from President Bush to President-elect Obama.

He was put in charge of the firm’s FICC division because of his success as a salesman in London and Tokyo. Given his lack of experience in risk management, and the strong support he enjoyed in the executive suite, it stands to reason that Semerci felt his mandate was to grow revenues as quickly as possible. In fact, not only was Semerci not a rogue trader, he was far closer to being the model employee of the recent boom era. He was a product of Wall Street’s bonus culture, which rewards employees according to how much revenue they produce for their firm. He rose quickly at Merrill Lynch because he demonstrated an uncanny ability to sell complex financial products to institutional investors and banks around the world. Up until his promotion, Semerci had been rewarded for his ability to produce, to deliver results in the near term, without regard for the long-term consequences of his actions.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, break the buck, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

If you’re trying to stabilize financial markets, do you bankrupt a bank to do it?” The upshot was that the governments of America, Britain, and other countries injected billions of equity into their biggest banks—such as RBS and Citigroup—as well as guaranteeing their debt. And yes, any investor or creditor not on the same level as the government got a free ride—all the hedges constructed by the bankers continued to function, and the bonus culture supported by the hedging continued to function. It was politically embarrassing, for example, when Merrill Lynch and Citigroup, which together lost $54 billion and received government bailouts of $55 billion, paid out bonuses of $9 billion.32 A year later, with the government guarantees still supporting the system, nearly all the banks started reporting record profits. But something had changed.

Dinallo could call the bluff of monoline default swap counterparties threatening to use collateral triggers, because under New York law he was the designated administrator of insolvent insurance companies, which gave him the power to determine who got paid and when. Other U.S. state insurance regulators had similar powers. By contrast, AIG’s holding company was not an insurer. 31. Of the $57 billion in debt that Sigma had outstanding in June 2007, all but $6 billion had been paid back by October 2008. 32. See the report by New York attorney general Andrew Cuomo, No Rhyme or Reason: The “Heads I Win, Tails You Lose” Bank Bonus Culture, 2009, http://www.ag.ny.gov/media_center/2009/july/pdfs/Bonus%20Report%20Final%207.30.09.pdf. Epilogue 1. For example, see the report Global Banks—Too Big to Fail?, published by J.P. Morgan Chase in February 2010, www.jpmorgan.com. 2. See U.K. Office of Budget Responsibility prebudget report, June 2010, http://budgetresponsibility.independent.gov.uk/index.html. 3. James Sassoon, interview by author, November 2009. 4.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

However, one could view such a policy not as a solution but as, at best, a stepping stone to a renewed vision or, at worst, as a way of making the best of a bad job. Getting back to full employment through stimulus policies would not resolve the difficulties of the US, but it would reduce the immediate misery. One cannot let the best be the enemy of the good. Andrew Smithers of London-based Smithers & Co. suggests yet another structural constraint. In The Road to Recovery he argues that the bonus culture distorts the behaviour of corporate management, particularly in English-speaking countries, in a destructive direction.44 Above all, it focuses managerial attention on ways to raise reported earnings and share prices in the short run, since managers are unlikely to be in charge very long. Their goal is to cash out as successfully as possible and as quickly as possible. They can do this not only by using the earnings to buy shares in their own companies, but also by borrowing to fund yet more such buy-backs.

Alternatively, shareholders could offset corporation tax against their own individual tax payments, as was done in the Advance Corporation Tax system of the UK, prior to 1997. It would also be possible to raise corporation tax while increasing investment incentives. Again, the effect would be to encourage distribution of any profits over and above those needed for investment. In addition to these changes, as Andrew Smithers has argued, there is a powerful case for attacking the bonus culture, which leads management to under-invest in capital goods and over-invest in share buybacks.17 The fourth area is changes in financial contracts. The idea would be to create debt contracts that automatically adjust to circumstances. Index-linked debt is an example: the nominal value depends on the rate of inflation. Similarly, the nominal value of mortgage debt could be indexed to house prices: if house prices rose above a certain amount, lenders would share in the gain and similarly, if house prices fell, lenders would share in the losses.


pages: 160 words: 46,449

The Extreme Centre: A Warning by Tariq Ali

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Affordable Care Act / Obamacare, Berlin Wall, bonus culture, BRICs, British Empire, centre right, deindustrialization, Edward Snowden, Fall of the Berlin Wall, financial deregulation, first-past-the-post, full employment, labour market flexibility, land reform, light touch regulation, means of production, Mikhail Gorbachev, Monroe Doctrine, mortgage debt, negative equity, Neil Kinnock, North Sea oil, obamacare, offshore financial centre, popular capitalism, reserve currency, Ronald Reagan, South China Sea, The Chicago School, The Wealth of Nations by Adam Smith, trade route, trickle-down economics, Washington Consensus, Westphalian system, Wolfgang Streeck

To campaign for similar policies and challenge the Extreme Centre and the sprouting New Right. Clinging to the fraying coattails of the ‘labour movement’ is a recipe for inaction. Politics, not sociology, is the need of the decade. The People’s Vow 1. We won’t let the poor suffer any longer for errors made by bankers and politicians. Our movement will endorse higher wages and deeper investment over greed and the backslapping bonus culture. Social justice campaigners everywhere, whether in Edinburgh, London, Cardiff, Dublin or Barcelona, can expect our full support because our challenges are international. Together with trade unions, community groups, charities and academic experts, we will prepare a people’s budget to save Scottish public services. 2. We won’t let anyone sell our natural resources to the highest bidder. Scotland has a unique physical inheritance, and polluters are not welcome to it because it belongs to us.


pages: 237 words: 50,758

Obliquity: Why Our Goals Are Best Achieved Indirectly by John Kay

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Andrew Wiles, Asian financial crisis, Berlin Wall, bonus culture, British Empire, business process, Cass Sunstein, computer age, corporate raider, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, discovery of penicillin, diversification, Donald Trump, Fall of the Berlin Wall, financial innovation, Gordon Gekko, greed is good, invention of the telephone, invisible hand, Jane Jacobs, Long Term Capital Management, Louis Pasteur, market fundamentalism, Myron Scholes, Nash equilibrium, pattern recognition, Paul Samuelson, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, The Death and Life of Great American Cities, The Predators' Ball, The Wealth of Nations by Adam Smith, ultimatum game, urban planning, value at risk

The complexity of the relationship between the whole and the parts is an important reason why obliquity—the process of adaptation and discovery—is, as it was for the foresters, the best means of promoting the health of the whole. Yellowstone blazed, and Lehman failed, because those who imposed direct solutions to problems did not appreciate the complex relationships among objectives, goals and actions. Extinguishing all fires made the forest more vulnerable, and the bonus culture destroyed the organization that fostered it. Obliquity recognizes the futility of reengineering, the impracticality of employing “serene and lucid minds” to conceive, as Le Corbusier visualized, a plan that “ignored all current regulations, all existing usages and channels.” Le Corbusier developed grandiose plans for the redevelopment of cities, most spectacularly the Plan Voisin, which would have razed most of central Paris to create a planned urban environment.7 This rebuilding never happened.


pages: 193 words: 47,808

The Flat White Economy by Douglas McWilliams

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access to a mobile phone, banking crisis, Big bang: deregulation of the City of London, bonus culture, Chuck Templeton: OpenTable, cleantech, cloud computing, computer age, correlation coefficient, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, eurozone crisis, George Gilder, hiring and firing, income inequality, informal economy, knowledge economy, loadsamoney, low skilled workers, mass immigration, Metcalfe’s law, Network effects, new economy, offshore financial centre, Pareto efficiency, Peter Thiel, Productivity paradox, Robert Metcalfe, Silicon Valley, smart cities, special economic zone, Steve Jobs, working-age population, zero-sum game

Meanwhile young people with what appeared to be far for money than sense moved seamlessly from the high-adrenaline working world of the City trading floor to the high-adrenaline playgrounds of the champagne bar, the lapdancing club and the Ferrari showroom. The lifestyle trickled down from the traders to the people who serviced their requirements. Stories abounded of supporters of London football clubs waving their wage packets at visiting Liverpool supporters, chanting “Bet you’re on the dole!”. Shops, bars, restaurants and other service providers in London benefitted financially but suffered morally from the mega-bonus culture that infiltrated London in those days. People think of the heyday of the “loadsamoney” culture being the 1980s. But the financial merry-go-round in the city didn’t actually come to a shuddering halt until the great financial crisis of 2007/08. Bonuses continued to rise and London’s economy, driven by financial services, grew much faster than the rest of the UK. Culturally, the noise of “spend, spend, spend” grew quieter – the wealth had started to age and a degree of discretion had emerged – but London’s disproportionate wealth continued to accumulate.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, money market fund, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Robert Bork, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

It would be costlier, Americans were told, than the entire Vietnam War, or the Louisiana Purchase, or just about anything else. And it was unmistakably bad: the bailouts were the avenues by which our government obligingly moved the financial industry’s losings over to the taxpayers. In different times, the TARP might have become the rallying point of a revitalized Left. After all, the bailouts were clearly of a piece with the misbehavior that had come before: the deregulation of the banks, the bonus culture, the wrecking of the supervisory state. Business-friendly conservatives had been behind each of these, and then business-friendly conservatives had knitted together the TARP for the same rotten reason: to give the bankers whatever they wanted. Reformers might have depicted the TARP as the final chapter in the great book of fraud, the episode in which Wall Street used the captured state to transfer its debts to the public.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Handelsbanken sailed through the financial crisis with a model founded on what it calls the “church-tower principle,” the idea that branch managers should do business only as far as they can see from the local spire. Decision making is extremely decentralized; the branches make all the credit decisions, and there are no detailed budget targets for them to meet. Customers do not spend years of their lives waiting in call-center lines; they call up and speak to a person whose name they know. There is no bonus culture, either. If Handelsbanken’s return-on-equity goals are met, then a portion of the profits is funneled into the bank’s pension scheme, which is its largest shareholder. It’s all wonderfully Swedish. But personalized service and relationship banking are also expensive. The Handelsbanken model works because it is selective about the types of customers it takes on. The bank itself acknowledges that a mass-market bank would find it tough to copy its model and be profitable.


pages: 537 words: 99,778

Dreaming in Public: Building the Occupy Movement by Amy Lang, Daniel Lang/levitsky

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Bay Area Rapid Transit, bonus culture, British Empire, clean water, cognitive dissonance, collective bargaining, corporate governance, corporate personhood, crowdsourcing, David Graeber, deindustrialization, facts on the ground, glass ceiling, housing crisis, Kibera, late capitalism, mass incarceration, Naomi Klein, Occupy movement, oil shale / tar sands, out of africa, Plutocrats, plutocrats, Port of Oakland, Rosa Parks, Saturday Night Live, Slavoj Žižek, structural adjustment programs, the medium is the message, too big to fail, trade liberalization, union organizing, upwardly mobile, urban renewal, War on Poverty, We are Anonymous. We are Legion, We are the 99%, white flight, working poor

– Oxford English Dictionary Index #ows see Occupy Wall Street Abraham, Julie 13 access to Occupy sites 197, 216-20 Accounting Working Group 120 Achtenberg, Emily 13 ACT UP 19, 21 administrative structures see general assemblies; spokes councils and working groups advertising 31-2 affiliations, rejection of 99, 101-3, 299 see also co-optation Afghanistan 16, 225 age diversity see children; young people and older people agriculture 49, 225 AIM see American Indian Movement Alberta tar sands 45, 152, 165 Albuquerque, US 147, 195 alcohol policies 281 Algeria 9, 21 All of Us, or None 272 American Indian Movement (AIM) 150 American Library Association 61, 62 Amig@s de Mumia de Mexico 65 amplification bans see people’s microphone Anderson, Marian 90 Anonymous (masked occupiers) 175, 186, 277, 291, 293 Anonymous (poem) 14 anti-globalization protests 44, 58, 64, 229 anti-war campaigns 67, 228, 243, 296, 297 Anzaldúa, Gloria 169 Aoki, Richard 195 aphorisms 197, 199-200 Appel, Hannah Chadeyane 99, 112, 253, 260 Arab Spring 58, 68, 102, 204, 236 Argentina 20, 21 arrest counts 238, 257 arts and culture 175-96 music 90, 111 performance art 28 poetry 14, 28 posters 28, 148, 181-3, 194-6, 204, 311 projections 192-3 puppetry 27, 28-9, 192-3, 263, 265, 266 writing and language 39-42, 277, 305 Ashraf, Hena 158 Atlanta, US 145, 147 Auden, WH 41 Austin, US 240 Australia 296 Bady, Aaron 125, 133, 197, 206 Baiocchi, Gianpaolo 277, 298 Bakersfield, US 57 Baldwin, James 15 Baltimore 47, 54 Bank of America 148, 215, 251 banks 59, 64, 73, 302 bailouts 67, 271 and housing foreclosures 226, 250-2, 271 Belgium 296 Bellafante, Gina 110 Benjamin, Walter 234, 236 Bierce, Ambrose 197 Black Panthers 19, 195, 240 Blair Mountain rebellion 73 blocking 113-14, 129, 130, 141, 158 Bocafloja 65 Boggs, Grace Lee 57, 164 bonus culture 27, 49, 271 Boston, US 108-10, 125, 128, 148, 165, 271, 272-3, 275, 291 Brazil 20, 28, 277, 278, 282 Britain 70, 292-3, 295 London 277, 279, 291, 294 northern England 277, 280-2 Brookfield 254 Brown, Adrienne Maree 72, 79, 85 Bryson, Jack 95 Burma 224 Bush, George W 39, 297 Cairo, Egypt 9, 70, 295, 297 Camp David 225 camping as protest 23, 277, 295-7 Canada 141, 164, 166, 167, 229, 296 capitalism 8, 32, 38, 54, 128 Captain Swing 277, 293 Carvalho, Alexandre 28, 29 Cassie (at Occupy LA) 216 Centro Cultural La Piramide 65 Centro Social Okupado ‘Casa Naranja’ 65 Cervantes, Melanie 148, 195 change identifying problem 221-2 see also living practices; politics and urban communities Chávez, César 194 Cheryl (at Occupy LA) 216, 218, 220 Chicago, US 20, 230, 231 children 110, 155, 240, 258 facilities for 92, 126, 240, 258 China 9 Chittister, Joan 57 Chomsky, Noam 28 Chris (at Occupy Wall Street) 155 Cindy (at Occupy LA) 220 City Life Vida Urbana 250, 272 civil rights movement 17, 19, 47, 56, 147, 195, 204 class/race inequalities 105, 142, 157-60, 166-7, 171-4, 223 Clegg, Nick 282 Clifton, Lucille 166 Climate Camps 296 climate change 45 Colbert, Steven 163 Colectivo Cordyceps 65 Colectivo Noticias de la Rebelion 65 Colectivo Radio Zapatista 65 colonialism 16, 50, 151-2, 164-5, 285 Colorlines.com 148 Columbus, Christopher 109, 150 Comfort Working Group 22, 30 Community Relations Working Group 115 Comrades from Cairo 70-1 conflict resolution 125, 126-7 consensus 47, 83, 85, 97, 105, 112, 117, 147, 230-1, 232, 266, 301 conversations, political 36, 37, 72, 76-8, 81, 110 co-optation 72, 97-8, 169, 225, 229 core values of Occupy/Decolonize 8, 21, 24-5, 45-6, 83, 277, 289 corporations grievances against 49-50 political influence 15, 18, 43, 49-51, 76, 144, 271 and social oppression 148, 165-7, 224 tax avoidance 98 see also banks and under named corporations Council of Elders 47, 56-7 Crane, Helga 89 crises 43, 59, 83, 270 alternatives to 152-3 Czech Republic 9, 64 Dake, Elizabeth 128 Dallas 257-8 Darth Vader 31 Davidson, Charles 98 Davis, Angela 194 Davis, Troy 155, 156 deaf sign language 218 @debcha 222 debt, foreign 21, 284-6 debt, personal 47, 50, 52-3, 242, 247, 271 decision-making 83, 85, 301 see also general assemblies: process declarations and statements 17, 18, 47, 49-51, 54, 56-7, 61-2, 157-60, 309 Decolonize LA 99, 104-7 Decolonize Toronto 166 definitions of Occupy 310 Dellums, Ron 172 demands 8, 21, 273, 299 rejection of 17-19, 47, 68, 81, 167, 203, 234, 239-40 Demarco (at Occupy Oakland) 94-5 Democracia Real Ya (DRY) 299 democracy 68, 70-1 see also participatory democracy Denmark 296 Denver, US 57, 141, 150-3, 165 Derrida, Jacques 33 Detroit, US 57, 72, 82, 83, 85-7, 118, 147, 201 direct action 225-52 Direct Action Working Group 75, 115, 169 disabled people 197, 216-20, 284 disadvantage, criminalization of 284-5 disguises 291-2 disruptive behavior 22-3, 96, 98, 119, 121-3, 127, 301 diversity of Occupy/ Decolonize participants 80, 93, 109-10, 136, 147, 155, 267 age see children; young people and older people gender see LGBTQ and women race see indigenous peoples; people of color and white people Dix, Carl 115 Dixon, Bruce A 141, 143 donations 30, 60, 92, 110, 114, 156, 241, 256, 257 Dongas 102 doublethink 282 drumming 115, 156, 261, 266 DRY see Democracia Real Ya Dueñas, Jose 171 Dwayne (puppeteer, at Occupy Wall Street) 265, 266 Earth First!


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

The result was the quasi-religious dualism between politics and economics that finally became unsustainable during the Lehman crisis. Politicians forced to support private banks with public money could no longer deny that government safety nets are a natural and necessary feature of social reality, whether in financial markets, or fire fighting, or the provision of defibrillators in public places.5 Banks driven to the brink of failure could no longer pretend that their reckless disregard for risk and “eat what you kill” bonus culture was purely a private matter between their shareholders, directors, and employees. Investors ruined by relying on theories of efficient and rational financial markets could no longer pretend that market-based financial regulations and accounting rules were always more reliable than political and regulatory judgments.6 The upshot was that the market fundamentalist opposition between government and private enterprise could no longer be seriously maintained.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, zero-sum game

The previous chapter described what it would take to fully police information advantage in the industry— as with Terry Fisher’s proposal for Internet content, mass surveillance is necessary. I borrowed this model from health care, where a swarm of contractors scrutinizes billing records to detect fraud and 212 THE BLACK BOX SOCIETY abuse. But another health care model, designed to prevent overbilling and overtreatment, is simply to pay physicians salaries, rather than “per-procedure.” Imagine if this approach were to supersede the bonus culture of Wall Street (where, for most key players, annual pay is peanuts compared to the bounty available in a banner year of spectacularly successful risks). Sure, in health care, there are worries that salary-based pay will lead to shirking. But given how destructive financial innovation has been over the past decade, maybe bankers ought to work less, at least until they can better prove how their sector contributes to real productivity.82 Restoring Trust For too long, we have assumed that the core aim of fi nancial regulation is disclosure.83 When every consumer understands the consequences of his actions, we like to believe, and when every investor has the same key data about a security as its seller, the fi nancial playing field will fi nally be leveled.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

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activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

The person replied that they had met before because he too was a partner. He then said he ran what the senior partner called a relatively important business, and yet he hadn’t remembered meeting before. By the time the senior partner got off the elevator, he had made up his mind it was time to get out and retire. Working with other people’s money also coincided with changing attitudes toward risk management. With the change to a bonus culture, there was more incentive to take risks, and because the partners were no longer personally liable for covering losses, the constraints on risk-taking (not just financial but also reputational) were loosened. Those in areas such as proprietary trading had the opportunity to make more money than banking partners if they made the firm significant amounts of money. The incentive was to ask for and to invest as much capital as possible, because the more money you were given, the more you could potentially make with your trades.


pages: 388 words: 125,472

The Establishment: And How They Get Away With It by Owen Jones

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anti-communist, Asian financial crisis, bank run, battle of ideas, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, don't be evil, Edward Snowden, Etonian, eurozone crisis, falling living standards, Francis Fukuyama: the end of history, full employment, G4S, glass ceiling, hiring and firing, housing crisis, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, James Dyson, laissez-faire capitalism, light touch regulation, market fundamentalism, mass immigration, Monroe Doctrine, Mont Pelerin Society, moral hazard, Neil Kinnock, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, old-boy network, open borders, Plutocrats, plutocrats, popular capitalism, profit motive, quantitative easing, race to the bottom, rent control, road to serfdom, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, stakhanovite, statistical model, The Wealth of Nations by Adam Smith, transfer pricing, union organizing, unpaid internship, Washington Consensus, wealth creators, Winter of Discontent

Even though he was straight and married, Darren was often referred to as the ‘office fag’ and ‘poofter’ because he didn’t indulge in macho behaviour and avoided the outings to lap-dancing clubs. ‘There were very few women on floors, and when they walked past desks, there was lots of leering.’ The ideology promoted by the outriders – that individual self-enrichment was the key to economic growth – was championed by the financial sector like no other. ‘Greed is the primary driver,’ says Darren. ‘There’s an awful lot of focus on the bonus culture. You’re working with money every day: you’ve got a daily measure of your success, which is how much did you make today, then this week, then this year, constantly thinking, talking about money. They think they made that pie, and they have the right to a big chunk of it.’ As a closeted gay man and a ‘reluctant investment banker’ from a working-class background in Romford, Essex, Jim had a similar experience, finding himself in a sector awash with primitive forms of prejudice.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

Nonetheless, they do enrich executives, who took from 66 percent to 82 percent of their compensation in stock between 2006 and 2012.26 “It is surely difficult to praise buybacks as being good for shareholders when they are made at such disadvantageous times,” says Andrew Smithers, a British economist and financial consultant. (His book The Road to Recovery makes a convincing case that buybacks and the bonus culture are responsible for slow growth not just in the United States but in many rich countries, because they encourage executives to pay themselves, rather than investing in things that will actually make their companies more profitable.) “Buying overpriced shares is a way of destroying value and spending more money when the market is most overpriced is particularly egregious.”27 What this means on a practical level is that the common claim of corporate leaders—that tight credit conditions, a lack of consumer demand, and an uncertain regulatory environment have kept them from investing their cash hoard back into the real economy—is at best a half-truth.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Bankruptcy Court approved a bonus pool of $50 million for the remaining derivative traders at bankrupt Lehman Brothers, who had been kept on to wind down its transactions. Dissatisfied with his number, a young banker protested that it “was not a bonus! It’s a tip!” A tip or gratuity is a noncontractual payment for special service, sometimes related to the relative status of the parties. No doctor or surgeon expects to or receives a tip for doing their job properly. The bonus culture encouraged moral hazard—a focus on narrowly quantifiable outcomes while ignoring wider risks and costs. Elite bankers and traders took risks with other people’s money, aware that if they won the bet they would get a significant share of profits, while suffering no permanent damage if they lost. In a comedy sketch featuring British comedians John Bird and John Fortune, the interviewer asks: “Can we talk about moral hazard?”


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

For an attempt to approach the JPMorgan board on the issue of capital regulation, see Anat Admati, “An Open Letter to JPMorgan Chase Board,” Huffington Post, June 14, 2011. See also Robert Jenkins, “A Bank Run for the Benefit of Its Owners? Dream On,” Financial Times, January 8, 2012, and Jenkins (2012c). 34. Only two major banks have publicly disclosed clawbacks (see “ ‘Likely’ JPMorgan Clawbacks Rare on Wall Street,” CNNMoney, CNN, June 13, 2012). On governance and bonus cultures, see also “Hit Bankers Where It Really Hurts, in Their Bank Accounts,” Bloomberg, July 13, 2012, which also mentions a potential role for the Sarbanes-Oxley Act. 35. On possible regulation of compensation structures, see Bebchuk and Spamann (2010), Bebchuk et al. (2010), Wolf (2010), and Bhagat and Bolton (2011). For a proposal that attempts to address different governance issues by creating “liability holding companies,” see Admati et al. (2012c).


pages: 554 words: 168,114

Oil: Money, Politics, and Power in the 21st Century by Tom Bower

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Ayatollah Khomeini, banking crisis, bonus culture, corporate governance, credit crunch, energy security, Exxon Valdez, falling living standards, fear of failure, forensic accounting, index fund, interest rate swap, kremlinology, LNG terminal, Long Term Capital Management, margin call, Mikhail Gorbachev, millennium bug, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, passive investing, peak oil, Piper Alpha, price mechanism, price stability, Ronald Reagan, shareholder value, short selling, Silicon Valley, sovereign wealth fund, transaction costs, transfer pricing, zero-sum game, éminence grise

Jimmy Dyer, a squash-playing BP trader in Chicago, became renowned for exploiting the advantages. “I wouldn’t be long [or short] in the spot this month,” Dyer would say, and thousands of contracts would be influenced. “Dyer’s fast,” Moorhouse told his colleagues. “He sees opportunities others don’t.” Renowned for his energetic trawling of the Internet for information, and for always demanding answers, Dyer had a reputation for pushing to the edge but not beyond. Motivated by the bonus culture, his rivals were not enthralled. “He’s loaded the bullets in the gun in Cushing and he’s socking the rest of the world,” complained a London trader. “He’s coining it going up and coining it coming down.” Charlie Tuke was a wary fan: “If he emptied his tanks, his players on the other side didn’t like him.” The walking wounded called Axel Busch, now at Energy Intelligence, a publishing and information company, and whispered their venom.


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What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business process, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, labour market flexibility, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

This pseudoscientific logic helped assuage any guilt and deflected brickbats from critics such as Mark Twain. During the Reagan era, similar pseudoscientific rationale was provided by the themes of shareholder capitalism, and especially by Ayn Rand. The outcome is that business leaders are constantly driving one another to garner more income. As Diane Coyle, visiting professor at the University of Manchester, wrote: “[The] banking bonus culture validated making a lot of money as a life and career goal…. Remuneration consultants … helped ratchet up the pay and bonus levels throughout the economy.”13 “Too much” became “never enough.” In hindsight, it’s clear that CEOs pursuing their own magnified self-interest within this new environment enabled business leaders to engage in de facto class warfare as they strove to seize a larger share of the gains from growth.