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Greed Is Not Good at Trader’s Narrative

Greed Is Not Good

This is a response to Smith’s essay in the Wall Street Journal on February 7th, 2009 titled “Greed is Good“. In the essay Smith, a former partner at Goldman Sachs argues that bonuses are a necessary part of compensation on Wall Street and that changing this would damage the competitive nature of firms as the best and brightest would leave for greener pastures. Smith uses exhortations and an anecdote from his own past to make his case:

I was … horrified to learn that my annual take-home pay would be limited to my small salary, which accounted for about a quarter of my previous year’s income. Fortunately the partners decided to pay a small bonus out of their capital that year to help employees like me get by.

This was 1973, a time of tremendous economic shock for the average American. What Smith conveniently leaves out is just how much his salary was. I’m willing to bet that even without the bonus (that he did end up getting) he wouldn’t have had to rely on food stamps like many of his fellow citizens.


Of course, the problem is that unlike the story he recounts from the 70’s, current investment banks are not private partnerships but public enterprises which have a fiduciary responsibility to their shareholders. When you look at the amount of shareholder wealth that has been nuked and compare it to the billions that were paid in ‘bonuses’ to generate these losses, you get a glimpse into the lopsidedness of things. Oblivious to reality, Smith expects Wall Street firms to act as if they are still private partnerships when in reality they are public.

We seem to be living in an altered reality: one where a $700 billion ‘blank cheque’ can be written to corporations based on nothing more than the flimsy support of vague promises on 3 pages, while a similar amount for everyone’s benefit has to run the gauntlet of Congress and go on for hundreds of pages in detail. One where banks claim that bonuses are needed to keep ‘talent’… yes, the very same so called ‘talent’ that replaced Wall St. with a giant maw. One where capitalism’s banner is raised proudly when the money is flowing in but where it is hastily lowered and stowed away for CEOs to play the mendicant. One where a person receiving welfare has to jump through hoops and tolerate intrusive government involvement in their personal lives but where banks rage against even the smallest concession when receiving billions of tax-payer’s money.

The best analogy to describe this is a Persian parable that I grew up hearing when I would make excuses to evade sacrifice or hard work. As preamble, in Farsi, the word for an ostrich is shotormorgh, a composite of two words: camel (shotor) and bird (morgh).

The story goes that an ostrich was approached and asked to help carry a load. It balked saying, ‘How can you ask this of me? Can’t you see I’m just a bird?’. Then it was asked to fly and take a message for a faraway town. To which it then replied, ‘What? you ask me to fly even though you can see clearly that I’m a camel?’

This insistence to have it both ways has become a hallmark of Wall Street. Just recently there have been a spate of hedge funds that have decided to simply shut down when faced with large losses. Prentice Capital and Tontine Associates are two of them with losses of 88% and 60% respectively. Rather than work hard at earning back the money they lost to clients and reach their high-water mark, they want to start a new fund and start to earn 2/20 commissions right away. Heads, I win - tails, you lose.

As far back as 12 years ago the Bank of England saw the inherent problem with a system that compensated employees for profitable risk-taking, but refused a consequence for any potential losses. Daniel Davies, a senior economist at the Bank of England wrote in 1997:

Employees’ contracts almost always involve limited liability; they may share profits from favorable trading outcomes but it is difficult or impossible to make them compensate their employers for losses…

The recommendation was to stretch out the time period for bonuses but it was firmly rejected by the City who saw it as intervention and an attempt at regulation. Of course, now these same laissez-faire disciples have no problem demanding that the taxpayer rescue them. The Royal Bank of Scotland is 68% owned by the UK government and yet, they are fighting tooth and nail to keep their bonuses.

Heads, I win - Tails, you lose
But beyond this paradox the lesson here is that greed is not good. That may be an odd thing to read on a blog about trading but I say that because, in fact, anything taken to excess will, eventually, create its own downfall. This is a truth that is self-evident. To all, that is, that choose not to ignore it. The rampant excess, hubris and sense of entitlement on Wall Street would make Caligula blush.

The obvious answer is if you want a market economy, then you take your losses along with your profits. If you want to bask in a performance based compensation, then you can’t be compensated as a star when you are the biggest loser. These watershed moments are what underlie cultural shifts. It isn’t just coincidence that the number one movie in the US is Slumdog Millionaire a story of a poor young man triumphing in a society where the rules are written by the wealthy, not the sequel to Wall Street.

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5 Responses to “Greed Is Not Good”  

  1. 1 Markus

    “… anything taken to excess will, eventually, create its own downfall.”

    Risk Management is not only a very important and often neglected part in trading but also in other aspects of life

    Great stuff. Thanks,


  2. 2 Babak

    You’re welcome. Yeah, it is about balance, harmony. When you figure out how to welcome balance into every facet of life, please let me in on the secret :-)

  3. 3 George Strell

    Very good article and well written. I would love to see you give your message to the “brain dead” congressemen and women. They sure need an education.

  4. 4 PEJ

    great post, thanks babak!

  5. 5 AshcroftB

    Our current economic atmosphere is undisputedly a result of massive greed and corruption on the part of governmental and financial institutions.
    So why is this viewed as a crisis instead of progress if, in fact, greed is good?

    The problem is we hold onto the myth that greed is integral to the success of Capitalism.
    The reason this myth hasn’t been universally denounced is because it is caught up in language and how we choose to define greed.

    Ambition is defined as a desire for rank, fame, money, power, or to achieve a particular end.
    It does not speak to the motivation for that desire or one’s intentions after having achieved the desired end.
    It is neither good nor bad, but is generally regarded as a virtue and the driving force fueling competition.

    Greed is often defined as an excessive desire to acquire and possess more than one needs or deserves.
    The key element (the element distinguishing from ambition) is ‘more than one deserves’ since what one actually needs is arbitrary.

    By one interpretation, greed offers the most practical incentive for people to work harder than the next guy, get a good education, invest in a business, and acquire wealth. This implies hard work, ability and determination and is, by definition, not really greed. This is actually just ambition and can be good and healthy and a necessary component of our economic system.
    Another flavor of greed is being the motivating factor to lie, cheat, scam, and do other unethical or illegal things in order to achieve one’s ambitions. This form of greed defies the tenets of the free market.

    The blanket statement “Greed is good” ignores such distinctions of interpretation enabling cheaters and, in turn, degrading the free market system. As a matter of common sense, we can say “Love is good”, but when we further qualify it to love hurting people or loving a child sexually, it no longer holds water. So the legitimacy of the statement “Greed is good” is more a matter of language than of ideology.

    In the most basic sense, a Venture Capitalist is just another job in the free market system.
    The responsibilities are to analyze and speculate as to the actual value of commodities, stocks, etc. and invest accordingly thus driving the free market. If you do your job well you should make a profit, but this alone does not imply greed. I think we can all agree the system works when properly checked and balanced, but the effectiveness of the system is perpetually hamstrung by greed (2nd form).

    In short, Gekko was wrong. Greed is NOT good.

    Where do we go from here?

    We may or may not sympathize with home-owners who have been foreclosed as they did take their chances and hopefully understood the conditions of their loan contracts, but we all agree the burden of this catastrophe (if that’s what it is) should not be borne by Main Street.

    To quote Michael Josephson, “If you have an unregulated arena, cheaters win”.
    That isn’t to suggest that the answer is more regulation, but perhaps better regulation - simpler and more transparent regulation.

    The legal system in the United States is by far the most complex in the world and each year it only grows larger and more convoluted, especially in economic policy and tax legislation. This ensures that fewer and fewer people are capable of understanding and vetting proposed legislation before it goes into effect.
    Our uneducated congressmen, let alone our citizens, have almost no chance of catching bad legislation in time to prevent the inevitable exploitation by those who have the resources and foreknowledge to take advantage of the changes.

    Then we have the Federal Reserve, the hidden power-players who are accountable to no one.

    We all realize the game is fixed, but we still play because no one truly believes that systemic change is possible and we figure, “Hey, at least we know the rules well enough to gain some ground this year.”

    I daresay if you go back to one year ago we, as a nation, had less faith in the American Dream than anytime since the war in Viet-nam so it came as no surprise when last years’ presidential election boiled down to one word. Change. The same rhetoric that is guaranteed to work at least once per generation. In pessimistic times change is a surefire bet and Obama was a shoe-in. We, as a populace, suffer from the battered citizens’ syndrome, telling ourselves that “this time will be different.” Why? Because we need to believe again.

    Don’t get me wrong, I am an Obama man. I’m not sure if we ever had a candidate that exuded so many of the qualities we all look for in a leader: intellect, empathy, composure, integrity, and even moderation in divisive times. Also, not enough can be said about boons that come with being in the right place at the right time.

    It’s way too early to pass any judgement, but the pledges to introduce more transparency to the legislative process are inspiring. Sure, the bailout is more of the same, but it was on the table even before the election and it’s just too early in his term as president to try anything too radical. The jury is still out and will be for some time, but I truly think there is a sense of optimism in the minds of the people these days, despite the continual doom n’ gloom overtones. Obama is still managing expectations in anticipation of more bad news. You can’t start selling optimism if things are about to get worse. The one thing I think we can all agree on is that these are some interesting times in which we are living.

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