Wednesday, April 2, 2008

Troubled Market - Obvious Change Required, But How to Achieve It

Performance Related Pay has been the primary method of compensation for high level employees for the last 20+ years....Anyone with the ability to affect the volume of sales or profitability from sales should be directly compensated from this money, thus motivating them to bring in more business, cut costs and increase profit. It is also one of the primary components of the SubPrime Crisis and other financial mishaps.... With huge bonuses available at the end of each year and one good bonus being enough to pay for a house, set you up for life or start your own fund/ company employees are willing to take huge risk to ensure their bonus this year is amazing with little or no care for two to three years distant....

With this factor in mind, large financial institutions have phenomenal profit and growth so long as the market has the capacity to absorb it, however in economic downturn many of these short term maneuvers become illiquid and are unsaleable. Thus the bank has to take the brunt of the loss.

When i use the term absorb, I am of course taking about off balance sheet, international companies. This is something that Goldman Sacks has excelled at and continues to excel at by hiring the brightest and the best. It is only a matter of time before which they have to admit openly to some of the losses they have incurred and to some of the downsides of their investments that they can no longer hide. The major factor is that no one wants a "holey" ($0) bonus so they will continue to find ways to hide losses and to look like the shining hero's of the sub prime crisis. Remember they were no less greedy and no smarter than all the other institutions they just hide it better! Thus i factor a major "scandal" within the next 8-12 months which will significantly affect their share price.

Copyright Jonathan Rose 2007 - Creative Commons License

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