Photo: Flickr / grenade
When you lose money, how should you get paid? Wall Street is supposed to be a place where you ‘eat what you kill’ so if you get killed, shouldn’t you go hungry?That’s a question we’ve been wondering about since JP Morgan’s massive trading loss was revealed last month. Sure, the entire Chief Investment Office (and the executives that should’ve been watching them) has been under scrutiny. But that isn’t going to stop them from taking home some major cash.
That doesn’t sound like hunting to us.
Reuters’ Daniel Indiviglio has a suggestion for how to fix this inconsistency using the very innovations that brought about this trading loss — derivatives.
One way to make JPMorgan executives eat their own cooking would be as follows. Once the size of the group’s 2012 bonus pool is determined, the bank could create a synthetic bond whose notional size mirrors the performance of the so-called Whale trade. The bonus pool essentially would buy the long side of that derivative and the resulting bonds would be delivered to employees in the form of bonuses.
This long-term compensation would be linked to the fate of the bad hedges. The bonds would mature when the trade does. Any losses in the securities doled out to bankers ultimately would benefit JPMorgan and its shareholders. Any gains would flow to the employees involved.
Make that a rule, and we think (all of the sudden) a ton of JP Morgan’s would get much more careful in the wild.