Why you need to pay Bankers

The problem is with the CAPM. According to this theory, there is only one market portfolio. Consequently, all stocks are equivalent as long as they are part of a portfolio. So a low margin retail business, or a failing airline business is compared to an investment bank. Comparisons are based on an antiquated Accounting system. So a Balance sheet asset for a steel company is compared to the Balance sheet asset for a Derivative business.

Anyway, to come to the point, obviously the Financial company, which has no real assets to risk, will be more profitable, than the other industrial or even technology company. So, if just to make people happy, Bankers are paid less, then the residual profit will go to increase shareholder profits. But these shareholders are not demanding those additional profits. They do not even want those additional profits. Why else would they bid up Goldman Sachs to $150+ or whatever other ridiculous price at which it is currently trading. They do not need the additional return because according to the CAPM (Capital Asset pricing Model), they do not need that much additional return since the risk of this stock, has been mitigated through being part of the market portfolio.

So, since the shareholders do not need this money, the only competitive differential from one bank to another, is how much it pays its bankers. What is Citigroup going to do to compete once it has repaid the TARP money ? it is not going to launch a marketing campaign. Nor is it going to invent a new super financial product. It is simply going to pay more than the rest of the street to attract "talent". This is the easiest way for the CEO of any Bank to stay competitive. All that the "talent" is doing (which is mostly used car Salesmen masquerading as Financial geniuses), is moving their book of customer accounts to the highest bidder.

So there you see in a nutshell, what the people and the Politicians simply do not understand, is why you need to pay Bankers.