Regulators and governments alike have got their fingers crossed that reforms on executive pay will stop bankers going bonkers again. He theory runs that new layers of red tape on pay, bonuses and other incentives will avoid any repeats of banks dragging the entire global economy close to its knees in the way Lehman Bros et al did, but it’s a fool’s hope.
Part of the attraction of a career in high flying finance, and what scares most reasonable people away, is that it is as close to a meritocracy as exists. It’s dog eat dog, sink or swim, there’s little middle ground. Traders trade and, assuming it comes off, hero status is assured, albeit temporarily. Lasso in clients, you’re a winner.
The flip side, of course, is what makes the Square Mile and Wall Street so dangerous. You lose money more than once and you’re out of a job. Just like that. Gone. There is no tenure, no job security. Ten and 20-year careers end in a flash. That’s one reason why so many are paid so well. It’s a bit like combat pay. Survive and prosper, or get out, and if you’re going the firm hopes it happens before you lose it any money. It’s not the post office. It’s trial by fire.
You would think that would make the entire workforce afraid to do anything for fear of being tossed out on their can, back into the cruel, cruel averagely paid world. But a meritocracy works in the opposite way. You have very smart people trying to prove to each other that they are smarter than everyone else. Unlike acing a chemistry exam or even nailing your A-levels, the score is kept with real money – how much of the bonus pool you command for your do-or-die heroics.
Lehman Brothers was a classic Wall Street meritocracy. They wanted to one up Goldman Sachs to win the meritocracy game and get paid in spades. Let’s leverage this sucker up with mortgages. A trillion dollar balance sheet. Hey, if not us, who? When that trade went south, Lehman went bust. You lose money, you’re out. Goodbye. Unless of course the government bails you out.
To prevent the next blow up, the G20 is trying to limit pay and banish risk. But no matter what bureaucrats do, the financial world’s meritocracy of getting paid will live on. They’re going to figure out a way around any new rules. The game might move to hedge funds or some other dark corner of the financial market, but no amount of reform is going to kill this animal instinct.