Should Bankers Get Bonuses?

| November 14, 2011 | 0 Comments

I recently read a fascinating article by Nassim Taleb.  In case youre not familiar with Taleb, hes the author of The Black Swan, a book about the extreme impact of rare and unpredictable events.

The book became famous due to the Financial Crisis of 2008.  Taleb essentially laid out how banks were going to screw themselves by ignoring risk or more precisely, not understanding risk management.

Now Taleb is back with another groundbreaking recommendation

Eliminate bank bonuses!

Sounds pretty extreme, but frankly, I think he makes some good points.

Heres the thing

In the current system, bankers get paid to take risks.  And theres basically no punishment for being wrong.

Think about it this way  if a banker takes a huge risk on an investment and gets it right, he gets an enormous bonus.  But if he gets it wrong, he still gets his hefty salary and the bank is backstopped by the government.

So the banker gets off scot free, and the banks shareholders, or worse, the taxpayer, takes it on the chin.

Hows that fair?

Thats not the way it used to be.  Bankers used to be held accountable for their actions.

To put it in perspective, Taleb makes an interesting historical reference

In ancient Babylonia, if a home collapsed and killed the homeowner, the builder of the home was put to death.  Now obviously thats an over the top, insanely harsh punishment and wouldnt fly in modern society.

However, the underlying point remains, a homebuilder isnt going to take unnecessary risks if their life is in danger.  And a bank shouldnt take unnecessary risks if stakeholders livelihoods are on the line.

The problem is, I dont see bonuses going away anytime soon, if ever.  And I think big banks will continue to take risks as long as they can get away with it and that could mean trouble for shareholders.

Thats where penny stocks come in.

If youre interested in investing in banks, there are many penny stock regional banks worth looking in to.  Several of them are solid, well run companies and they dont take excessive risks.  Theyre just good ole neighborhood banks dealing with deposits, loans, and checking accounts.

Bottom line regional banks can provide great upside potential.  They dont have anywhere near the issues of the large, bonus-happy banks.  And best of all, these penny stocks are priced to buy.

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Category: Bank Stocks, Investing in Penny Stocks, Penny Stock Tips

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