…and having fun writing here at NQ and trying to spread some insights on these econoomic issues…

My better half just ran the kids out to a movie. She and I saw Revolutionary Road last night. Not my idea of entertainment.

Different shops handled compensation differently. At my first shop, First Boston, compensation was VERY subjective. The variables included profitability, seniority, reviews, and unfortunately politics.

At Bear Stearns, it was VERY objective. Each individual trader would have a gross revenue minus fixed expenses (phones, seat charge, research charge, etc) minus variable expenses (sales commissions paid, ticket charges based on volume) to generate a net revenue number. We got paid a percentage of that net. Very little need for conversation. The numbers were the numbers.

In addition to the payout almost every shop on the street has a percentage of a person’s compensation “held back” in order to disincent them from leaving. This worked as follows: typically the total comp was split 66% in cash and 33% in stock. The stock would vest over a 3 yr time frame. Meaning that you would receive 1/3rd of your total stock accrual each year. I am probably not being totally clear but it meant that after 3 yrs you basically had a full yrs worth of compensation tied up in company stock and it got paid over 3 yrs. If you wanted to leave a prospective firm would need to make you whole from the stock that you would be forced to walk away from. This stock accrual was known as the “golden handcuffs”. It became very difficult to leave a firm and walk away from the stock. When I got the opportunity to leave JPM on 2006, I wanted the flexibility and I took it. I was evry lucky to get out when I did and not have to live through the anxieties of the last few years. I can now work on a number of other interests and initiatives.

Fro the 80s to the 90s, almost every large shop went from some sort of commission payout to a strict salary bonus format so management could retain greater control over expenses.

IMO the problem with the compensation system is two fold. The structure is skewed on certain desks for traders to swing for the fences. If they knock it out of the park they get paid huge sums. If they strike out they walk or get fired. The problem lies in the fact that in swinging for the fences they often take and leave inordinate risks in the books. To the extent that there are remaining positions in the book, the firm should set aside reserves against those positions and detract those reserves from the bonus pool.

For a trader that has legitimately made significant revenues and totally squared their books then IMO he or she deserves to be paid fairly for those revenues generated.

In this process the firm should allocate capital in a more fiscally appropriate fashion.

Mr. Jamie Dimon right now has the greatest level of credibility in the industry. Believe me, in our mortgage business we were sharing with the powers that be the level of profits being generated in the sub-prime space in the 2000-2006 era (remember Dimon only came to JPM in summer of 2004) and prior management and Dimon both mandated that JPM was not going to be a player in that space. They were prudent and accurate in that call and it has saved the institution in a huge way. JPM is currently the strongest bank in the industry.

JPM has also been the biggest player in the CDS space. That said, the risk systems and risk oversight are tremendous. They measured risk not only in terms of market exposure but also counterparty credit exposure as well.

I do not know for a fact but I feel very strongly that the powers that be in Washington are in very close contact with Mr. Dimon on a regular basis.

JPM did not want government money. You can rest assured that many people there are not all that happy.

The problem now is not a JPM issue it is an industrywide issue.

Remember, as we wrote on Novemerb 12th “The Wall Street Model is BROKEN…and as Mr. Maloney said it is not only broken, it’s SMASHED.

Do you have a view on limiting bonuses if your bank took money.

Do I remember it correctly that you were with JP Morgan. I was reading a ariticle that alluded to JP Morgan haveing a lot of CDS exposure due to the fact that they were requested by the government to take over Bear Stearns. CNBC seems to put a lot of stock in what Jamie Diamond says. In a Davos interview he said that, they were looking at Bear Stearns and probably with a little more diligance would have walked from the deal. However the government asked them to take them over, and they did. That said he reaffirmed, they did not need the government TARP money, but were asked to take it to preserve the image of the other banks.

So – if the government limits the bonuses of JP Morgan, and they did not need the money, I could imagine hard feelings could develop.

Any insight to the above comments?