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The Jewish Ethicist: Tycoon Traders 1

The Jewish Ethicist: Tycoon Traders 1

Do Wall Street traders really earn their pay?

by

Q. Is it fair for Wall Street traders to be making tens of millions of dollars a year?

A. In the wake of the financial market crisis that began last year, many people in the general public became aware of the customary compensation system for Wall Street traders. Many are scandalized. Attention has intensified in recent weeks as people read of the Citigroup trader Andrew Hall who is due about a hundred million dollars for his work over the last year.

The job of traders is to guess which way markets are going and invest accordingly. The techniques they use to predict markets are quite varied. Many rely on careful market research, poring over balance sheets and sales projections to find companies whose underlying earning potential is much greater or less than the one reflected in the market price. Some use purely statistical techniques to identify prices that are out of alignment; for example, the same asset in two markets should be the same. Many other approaches are also in use.

Typically, traders get a "modest" base salary – modest by Wall Street standards means in six figures – and get a fraction of trading profits that is commonly in the millions of dollars, not infrequently in the tens of millions, and sometimes reaches over a hundred million dollars in a year.

Many ethical questions are directed at these compensation schemes.

 

  1. Do the traders really earn their pay doing something socially productive, or are they bandits who are skillful in ripping off the investing public?
  2. Is it fair for an ordinary salaried employee, not someone who built a business, to be getting so much money?
  3. Is it fair that some people are getting nine-figure paydays when others live in poverty?
  4. Is it right for anyone to control so much wealth?

 

In this column we will relate to the first issue, and in subsequent columns some of the other issues.

Traditionally, economists assume that speculators, such as today's Wall Street traders, create value by aligning asset prices with their true economic value, thus ensuring that investment capital is directed to its most productive uses. There is certainly nothing unfair about earning money by knowing how to buy cheap and sell dear. The Shulchan Arukh states that if a person knows of a bargain he is entitled to the profit from it; if he sends an agent to purchase on his behalf but the agent profits himself, that agent is considered unethical. (1)

However, some observers think that today's Wall Street traders today don't have any particular ability and actually make money because of the quirks of the bankruptcy system. Trading firms get all the upside of risky trades, but if there is a crash their creditors bear the loss. So it is a "heads I win, tails you lose" proposition for the public. If this is true, it wouldn't make trading unethical but it would make obligate regulators to close this loophole. In any case, I have trouble accepting this approach because it wouldn't explain why the firms pay traders such high salaries. After all, no special skill is necessary to engage in risky trades.

Another claim that is occasionally made against traders is that they prey on uninformed investors. This practice runs afoul of many principles of Jewish law. Legally, it may violate the requirement to disclose any defects in merchandise. Ethically, there is an additional problem. The Talmud states when someone is ill-informed about the odds against him, there is a lack of informed consent gambling against him. Maimonides states that this is considered a form of stealing. (2) This is not quite the same as selling a financial asset, which does have some inherent value, but ethically I think that it is in many ways comparable regarding a risky asset.

I believe that this is a widespread problem, but not among traders. The problem is very widespread among unauthorized people selling different kinds of get-rich-quick schemes, and to a lesser extent it is found among registered brokers. There was a high profile case a few years ago where brokers at a major firm pushed stocks to clients while privately they referred to them as "dogs". But the particular expertise of the high-flying traders is in arcane instruments which are not usually traded by amateurs at all.

So regarding the first question, my answer is that I do not find any grounds to doubt that traders earn their pay based on a combination of skill and good luck just like any other business person. It's just another way to make a living, with its own ethical challenges but without any unique ethical opprobrium.

SOURCES: (1) Shulchan Arukh Choshen Mishpat 183:4 in Rema (2) Maimonides' Code, Gezeila veaveida 6:10

Published: August 16, 2009


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Visitor Comments: 6

(6) SusanE, October 17, 2009 4:47 AM

Do you think these Men Earn their Pay?

This article on insider trading on a huge scale was in the news today from Reuters........................... http://news.yahoo.com/s/nm/20091016/bs_nm/us_hedgefunds_insidertrading_12 ...................................... And here: ................................. http://finance.yahoo.com/news/Billionaire-among-6-nabbed-in-apf-2808194948.html?x=0 ............................. I think these billionaires and other men made a lot of money and I don't know if they 'really' earned it. They haven't been convicted. So we'll wait to see how this will be played out in Wall Street. Groups of men who are very rich have squeezed the life and livelihood out of millions. I can't imagine even untangling this huge web of money. Our new President here in America sure has his work lined up all around the world.

(5) SusanE, August 22, 2009 6:34 PM

My Opinion doesn't Reallly Matter

You will have to tell me if Wall Street Traders are worth the money they command? What good do they do? What positive purpose do they serve? Who funds their salaries? ~~~~~~~~~~~~~~~~~~~ How do we set standards of what someone is worth? We do it by giving money to them and promoting them and by paying for their services. Either directly or indirectly. ~~~~~~~~~~~~~~~~~~` For some examples, (ball player) Ben Roethlisberger annual is $14.5 million dollars. Mel Gibson (movie producer) made $300 milllion for just one movie. Madonna (singer) still brings in $70 million a year. Dr. Phil McGraw (PHd talk show host) makes $80 million a year. Brittany Spears (singer) makes $8 million a year for doing 'something'. The Surgeon General of the USA government offiicial) makes $153 thousand a year. A mid-priced Las Vegas prostitute (working girl) earns $180 thousand annually. The Governor of Pennsylvania makes $155,572 a year. ~~~~~~~~~~ So.........you tell me what the Wall Street tycoons do for a living and if they earn their salaries. Personally, I think the country has gone mad.

(4) Michael Menard, August 20, 2009 5:21 PM

exorbitant renumeration

I must disagree with this as in effect the traders by virtue of their massive funding can move markets at their discretion.

(3) ruth housman, August 18, 2009 6:53 PM

ethics

There's so much public interest in this subject, of course, since Madoff and what happened on Wall Street. He certainly lived his name as he "mad(e) off" with a lot of money and much of this money was unconscionably lost to the people who invested. At The Rose Art Museum there's another kind of ethical dilemma as the President of Brandeis, will close the Rose and sell off much of the art work that was donated for the purpose of public viewing and not for the purpose of being used as liquidity when the university ran into debts due to Madoff and others. Is it ethical for a university to take works of art, donated for another purpose, and "own them" in this way? I think the Rose family has cause for a lawsuit and I wonder deeply about the ethics of what the President has done, not to mention, how he went about doing this, namely not informing those closest to "The Rose".

(2) Zvi Weiss, August 18, 2009 6:47 PM

Not clear that traders earn fairly

The recent revelations of firms with HUGE losse paying obscenely huge bonuses to traders who actually led these firms into bankruptcy seems to argue that these were NOT "proprly earned" salaries. In particular, at a time when these traders created an economic mess that harmed many people -- paying them bonuses (in many instances out of "bail-out money" -- money that comes from many of those harmed -- seems unjustifiable regardless of the "strict legality"

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