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<\/a> <\/span><\/p>\nStuck again. <\/strong>From a reader:<\/span> Are you fully aware of the MF Global mess? Our Ira’s were fully held by them. It\u00a0 seems to be another ARS\u00a0 (auction rate) type nightmare. I finally got my money from Raymond James- purchased ARS- and now MF Global. Wow any information you must have other readers trapped again. I can now say I am good at losing even without investing. Mr. Corzone seems to be a crook! Never realized he was involved or I would not have been with that company..Any thoughts?<\/p>\n The jury’s out on Corzine. Did he dip into client money to save his 40x-leveraged bets on Euro sovereign bonds?\u00a0 We don’t know yet.<\/p>\n What we do know is that when a broker-dealer blows up, viz MF Global, you’ll should ultimately get your money back. But the waiting and the uncertainty will drive you nuts in the meantime. And your lifestyle may suffer alarmingly.<\/p>\n Brokerage accounts — where you keep your money — are insured. Some more, some less. That’s the rub. You don’t know how much and what the rules are — until you thoroughly investigate. And then the conclusion is murky and you’ll\u00a0 get a lot of push-back. “Don’t worry. You’re covered.” etc.<\/p>\n I’ve wanted for a long time to write a piece on how brokerage accounts are insured. Every time I do my research, I get strange answers.<\/p>\n Suffice: Don’t keep all your money in one brokerage account. Just like you shouldn’t keep all your money in one bank.<\/p>\n Well over $5 a mi<\/strong><\/span>nute. <\/strong><\/span>I used my AT&T iPhone for 26 minutes of calls to the US from Asia in October. I’m figuring the numbers — AT&T’s bills give lack of detail a whole new meaning. But it looks like I spent $5 a minute — despite assurances from AT&T that the cost would be $1.50 a minute. I will check on this today — if I get time. But the thought of dealing with them instils fear and loathing into my tiny psyche. Do I really need the aggravation? Suffice, don’t use AT&T\u00a0 overseas — no matter which plan they sell you and what they tell you.<\/p>\n End Bonuses for Bankers. <\/strong>This is Nassim Nicholas Taleb’s piece for the New York Times. He’s Black Swan guy and New York professor. Ultra-smart fellow.<\/span> I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.<\/p>\n More than three years since the global financial crisis started, financial institutions are still blowing themselves up. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. So far, lenders and shareholders have been paying the price, not taxpayers. But it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008.<\/p>\n The promise of \u201cno more bailouts,\u201d enshrined in last year\u2019s Wall Street reform law, is just that \u2014 a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk.<\/p>\n Instead, it\u2019s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions \u2014 big banks, but also some insurance companies and even huge hedge funds \u2014 should be strictly regulated.<\/p>\n Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. <\/strong>The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.<\/p>\n Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called \u201cblack swan\u201d events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters.<\/p>\n Consider that we trust military and homeland security personnel with our lives, yet we don\u2019t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.<\/p>\n The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi\u2019s code specified this: \u201cIf a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death<\/strong>.\u201d<\/p>\n This was simply the best risk-management rule ever. The Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners \u2014 in, say, the foundation. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.<\/p>\n Banning bonuses addresses the principal-agent problem in economics: the separation between an agent\u2019s interests and those of the client, or principal, he is supposed to represent. The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls. Similarly, cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship. The Romans even figured out how to deter cowardice that causes the death of others with the technique called decimation: If a legion lost a battle and there was suspicion of cowardice, 10 percent of the soldiers and commanders \u2014 usually chosen at random \u2014 were put to death.<\/p>\n No such pain faces bailed-out, bonus-taking bankers. The period from 2000 to 2008 saw a very large accumulation of hidden exposures in the financial system. And yet the year 2010 brought the largest bank compensation in history. It has become clear that merely \u201cclawing back\u201d past bonuses after the fact is not enough. Supervision, regulation and other forms of monitoring are necessary, but insufficient \u2014 consider that the Federal Reserve insisted, as late as 2007, that the rapidly escalating subprime mortgage crisis was likely to be \u201ccontained.\u201d<\/p>\n What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring \u201clifers.\u201d Banking was bland and predictable; the chairman\u2019s income was less than that of today\u2019s junior trader. Investment banks, which paid bonuses and weren\u2019t allowed to lend, were partnerships with skin in the game, not gamblers playing with other people\u2019s money.<\/p>\n Hedge funds, which are loosely regulated, could take on some of the risks that banks would shed under my proposal. While we tend to hear about the successful ones, the great majority fail and their failures rarely make the front page. The principal-agent problem they have isn\u2019t a problem for taxpayers: Typically their investors manage the governance of hedge funds by ensuring that the manager is hurt more than any of his investors in the event of a blowup.<\/p>\n I believe that \u201cless is more\u201d \u2014 simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.<\/p>\n Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute, is the author of \u201cThe Black Swan: The Impact of the Highly Improbable.\u201d He is a hedge fund investor and a former Wall Street trader.<\/p>\n
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