* Original Question “The „City‟ doesn‟t pay any
taxes. We need to fix it.”
* The Correct Question - “There are a lot of
things happening here, not just Tax evasion.
Let‟s understand the Engine that powers the
City. And perhaps also learn something from it
to implement in our business‟s.”
* You love to hate them…
* Occupy Wall-Street & The 99% Movement
* Lets us take a structured look at the
foundations of the industry we all love to hate
Economic Profits [Rent] is directly proportional to market inconsistencies and inversely
proportional to perfect competition. There is lots of the former and very little of the latter.
The Industry works on a 2%-20% model. 2% of all the money they handle and 20% of the profits
There is no downside to failure, absolutely no penalty for not being able to make profits. The
clients believe in them to get the returns and the industry keeps on delivering. We already
know the Extreme Benefit of removing fear of failure from our organizations. Yet we don‟t
Traders get 5% of all the money they make for the company. So if he makes $100 for the
company clients, the company gets $20 from that (besides 2% fees) and the trader gets 5% of
$100 i.e. $5 as bonus or in effect ~25% of company revenues. Beat that!!!
There is no downside for the company nor for the trader, in case they don‟t make any profits
for their clients. Atleast in immediate financial terms.
There is no Upper Limit on anything, for the company or the employee. There is no fixed
bounds on bonus like the rest of the world, for achieving targets (!#%$$@#). The industry sets
a direction and everyone moves to make more and more money. You need to set a direction
not targets if you want to spur unlimited forward momentum.
Hedge Funds work in a virtually completely deregulated space and are the most profitable. If
returns are proportional to risk. Then regulation limits profits and increases complexity for
The Fuel that powers the Industry
* Dirt Cheap Debt @ 1-2% per annum
* Extremely high amount of organizational leverage. 30x is normal
* Daily wage makes $0.02m/annum
* Engineer makes $0.2m/annum
* Strategy Consultants $3m+/annum
* Traders $3m+/annum (which is a gross understatement)
* Hedge Fund Managers $500m-$1bn+ /annum
The Industry is placed in the middle of – Have Nots, The Have‟s [Here!] and The Have More‟s.
You always have someone [The Have More‟s] who have more than you and inspires you forward
and the means are readily available to you. Beat that!!!
The Industry has an exact calculation of how much profit can be Exactly attributed to one
Employee compared to other industries where bonus is related to some vague organizational
profitability figure and some vaguer performance measures.
* In the industry no one asks each other “Why?” they all say “Ofcourse!
The only purpose is very simple and clearly defined “Make more and
more money” The industry will exotically repackage and sell anything
to make profits [Structured Financial Products]. If you see the last
but one slide you will realize they have already virtually sold the
entire world, anything that could possibly be sold.
They are constantly looking for the next Goldmine
And they pay lesser tax than the maid‟s who work for them or you
and I who pay full standard tax rates.
Or they pay No Tax at all by exploiting Tax Exempt Jurisdictions.
Even the Govt. offers the Industry protection „Because‟ they have a
multiplier effect on the economy. Do you???. The thinking is “Hey
atleast someone is making huge loads of money, and the rest are
making some money along with them, which is better than nothing”
* The way the rest of the world works, you put in
efforts and then everything else/results are out
there in the future, somewhat unsure,
indirectly related and probabilistic in the
nature of final outcome.
* This industry is based on “Instant Gratification”
once the trades are done, you absolutely know
how much you have made or not made that
very instant. Your day is made or not made
right then and there.
I‟m sure you have no idea…
But according to The Economist – OTC (Over the counter) Derivatives
market was $700 Trillion in 2011 [Wikipedia] [No! I‟m not kidding. And No!
There is no typo here]. What is the size of the market you deal with? ;-)
To put that into perspective – The 2012 Total US Govt. Budget was $3.5
Trillion. US Stock market was $23 Trillion. And the entire World GDP was
The entire OTC Derivatives market is backed by around just $600700Billion in „Real‟ Assets. Which means the Industry leverage is about
1000X. Beat that!!!
BASEL – III regulations talk about some!!! Deleveraging. Yeah good luck
with deleveraging 1000X!!!
Conclusion: With a market of $700 trillion the top fund managers have to
be idiots to not make $1bn+ take home every year. And you don‟t have to
be the worlds smartest to make a $3+m bonus every year as a trader.
* This is a structured academic study of the financial
* The idea is NOT TO start another occupy wall street
movement or similar.
* But the idea is to understand the foundations of the
* Some of the learning‟s can be applied to other
industries and our organizations
* The learning‟s have also amply proven what I have
been trying to explain about Emergent Strategies
* Good Luck!!!