Why those junior bankers are paid so much

One of the things that keeps the junior bankers labouring long into the night is reading and proofing the prospectuses for whatever it is that the bank is trying to sell.

This is at the heart of those 90 hour work weeks.

The following is the formula for a properly structured warrant tied to Japan’s Nikkei index — which would (we presume) be easy enough to hedge for its issuer:

(Closing Level – Strike Level) x Index Currency Amount / Exchange Rate.

What follows is the formula attached to four recent warrants tied to Japan’s Nikkei index issued by Goldman Sachs:

(Closing Level – Strike Level) x Index Currency Amount x Exchange Rate.

Spot the difference?

In one, the index currency amount is divided by the exchange rate, in the other it is multiplied by the exchange rate.

The cost of this typo?

As the magazine noted last week, having spotted the error, Goldman Sachs offered a 10 per cent premium to buy the contracts back from the market. Investors, however, have not budged easily. Most are insisting that the bank honours its typo-ridden terms.

That, needless to say, would be a blow for Goldman.

The Economist estimates the typo could expose the bank to as much as HK$350m instead of the HK$10m initially offered on the warrants,

That, in part, is why bankers get so much damn money. Because mistakes are so damn expensive.

12 comments on “Why those junior bankers are paid so much

  1. Of course, it depends on which exchange rate we are talking about: JPY/USD or USD/JPY – a quick transposition would sort this problem… 🙂

  2. Pingback: Why those junior bankers are paid so much | Heart Rate

  3. “That, in part, is why bankers get so much damn money. Because mistakes are so damn expensive.”

    Possibly, but haven’t we got an incentives problem/mismatch here?

    If those junior bankers are not hit for the downside risk of their mistakes, their losses are limited to being fired. The trick is then to make enough dosh and hope that either you don’t make any mistakes (very hard as above) or that those mistakes don’t get uncovered (possibly more likely) before you’ve made that enough dosh.

  4. What fucking fools – if they would only write such things in the intelligent way (i.e. as algebra) proofreading would be easy-peasy. Arrrrgh – to think that such tits and their even more titish bosses get paid bloody fortunes to work with less usefully analytical intelligence than a competent tradsman. Arseholes.

  5. “That, in part, is why bankers get so much damn money. Because mistakes are so damn expensive.”

    Pffft. I could make the same mistake for half the money.

  6. Whenever I hear someone accuse another of being overpaid, I ask themif they could do their job. If they say no, then it proves there is a limit to supply; if they say yes, I ask them why don’t they go and be overpaid too? Turns out there are downsides to the job not previously mentioned.

  7. @The Pedant-General – its a good point that you make, however the very fact of the risk bearing mismatch only makes it more important that they hire good staff – which is what Tim is saying.

  8. Any manager who relies on staff working up to 90 hours a week to be proof-readers is an utter fool! They are almost certain to make mistakes!

    Moreover, such work could be contracted out to a specialist agency from £25-£100 per hour!

    No, Tim, not convinced by your argument here.

  9. I agree with dearieme – if these people knew how to do a dimensional analysis then one of these statements would occur in naturally-denominated units and the other would be obviously stupid. Presumably (although I’m not a financial trader) this is expressing the gearing between USD and JPY. If close and strike are dimensionless, index currency is USD and rate is USD/JPY, then the first has dimensions of USD/(USD/JPY) or JPY, which is sensible, and the second has dimension USD²/JPY, which is not.

    A spot of dimensional analysis would also stop dingbat environmental reporters saying things like ‘the average UK house uses 3500 kW a year’ (units of J/s²). It’s one of the most useful elementary tools students in science and engineering are taught.

  10. The guy who really makes the money is the one who figures out how to shift whatever loss accrues–onto the backs of the taxpayers. THAT’s where the real money is.

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