Using Veritas to Construct the "Per…

29-04-2017 Hits:88601 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:82283 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:82175 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:86671 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:83102 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:85224 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:56328 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:84566 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:84258 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:84118 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:90619 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:88187 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

Read more

The Financial Times has published an Op-Ed piece I penned on bonuses in the banking industry. Enjoy!

A bank employee recently asked me: "As a trader, my bonus is derived directly from my profit and loss, which is accrued over the quarter and kept in a separate account. It does not go into the firm's bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50m for the year my bonus is $5m. What does my bonus have to do with the mortgage-backed securities [MBS] trader who is sitting on losses? Did I or did I not show a profit of $40m to the firm's bottom line?"

 Main Street is absolutely flabbergasted that bankers do not understand the core issues of this bonus question. Allow me to clearly outline the problem and propose a solution. Assuming this trader works for a prominent US bank that received a bailout, he is not entitled to a $5m bonus if he made $50m for the year. Why not? Because he generated that 10% return from taxpayer capital, not firm capital. For example, Goldman Sachs would have had the drawdown from purgatory had it not been rescued from a $30bn credit default swap deal with AIG.

Let's assume AIG would have negotiated a 40% payout to Goldman Sachs, which is realistic given that litigation with an insolvent company that had many more contingent and direct claims would probably have resulted in a lower net receipt to Goldman. This alone would have resulted in a hole of about $7.8bn for the bank.

Taxpayer assistance

Combined with the Troubled Asset Relief Program, Federal Deposit Insurance Corporation bond guarantees, Public-Private Investment Programme for legacy assets and other alphabet programmes, not to mention hundreds of billions of dollars in MBS purchases that have put an artificial bid under toxic assets that abound on big bank balance sheets, it is clear to see that banks were undercapitalised and benefited greatly from taxpayer assistance. Without that assistance, the trader would not have had $50m to trade and may not have had an employer at all.

It really is that simple and there is no need to debate whether he deserves 10%. The real issue is 10% of what? He is relying on a 10% bookmakers' fee for betting with taxpayer contingent capital - not pure bank capital, and that is where the great misunderstanding lies. Even if one could justify getting paid from taxpayer capital in lieu of firm capital, the taxpayer capital should (as a product of prudent business practice) have been pegged to an appropriate 'cost', whose hurdle rate the trader would need to overcome. In other words, management should say: "This $50m costs us 14% in coupons on government-owned preference shares, thus you will not have positive return on investment until you break that 14% mark." If the trader failed to breach the 14% hurdle rate, he would not have received a bonus at all.

Simplifying risk and return

Now, I am sure many are quipping: "Well, how is a bank supposed to incentivise a trader if a negative return does not fund a bonus?" But think about it for just a moment, and you will see the implications. If the risk-adjusted cost of capital causes a business to become unprofitable - either for the employee or the firm - then neither the employee nor the firm should be in that particular line of business. The plan is ingenious in its simplicity and creates a self-regulating mechanism that prevents risks from being decoupled from rewards. This also applies to exotic derivatives transactions where in-built leverage allows for little or no upfront capital. You reserve properly for risks (counterparty, credit and market) and charge the cost of capital on the reserves.

This plan works for bankers too. Mergers and acquisition bankers use minimal firm capital, thus have relatively minimal economic hurdles to overcome. Hence, the banker would likely get a higher payout than the trader because he risked less capital, but he would still have to be paid via staggered or cliff vesting (depending on the nature of the deal) with restricted stock. In this scenario, bankers would not put together deals in a fashion that runs counter to the interests of the firm's stakeholders (at least not on purpose or through wilful negligence). Now bankers and traders become true economic partners in the firm, sharing both the reward and the risk of doing the deal - just like in the real world.

Reggie Middleton is an independent investor and financial analyst with experience ranging from insurance-linked securities structuring to real estate investment. See boombustblog.com