So the article of the day: The big traders are abandoning Wall Street in favour of Hedge Funds. Link: As they should.

All the big guys that do the cowboy thing and earn fun bonuses in cash are now being denied those bonuses in their former glory (those bonuses have been capped). So they’re leaving to join hedge funds, where life is unregulated and bonus decisions unburdened by interfering state politicians.

This will mean a less rosy time for the big banks and the institutions whose assets they manage. After all – any first year finance kid will tell you that high risk is high return, that good traders know when to take calculated risks, and that good traders know when the return ain’t worth it.

Is the expectation with the capped bonuses that somehow:

  1. the banks will make more conservative trades with less risk-taking (as the high-risk traders will leave in search of more high risk returns ie. performance-linked pay);
  2. that the big institutions will thus have less risk taken with their money;
  3. and then the bulk of the financial power will be less “agitated” and more stable (because most institutions’ investment choices (“asset allocation decisions”) are regulated and therefore cannot follow the high risk traders into hedge funds)?

The likely reality is that the capped bonuses had less to do with forethought and more to do with jealous malice from the voting public. How to win votes: give money to your voters, or take it away from everyone else. Except that playing with incentives doesn’t remove the desire for them; if anything, it just becomes more disruptive for business as the players try to regain lost ground.

What’s more likely to happen is that the banks will lobby against regulation and win, reversing the trend; or the institutions will lobby against regulation and win, allowing them more autonomy in their asset allocations; or the banks will attract lesser traders who will be thoroughly thumped by the former traders (because there must be winners and losers), still earn their capped bonuses, and the big losers will be the American public who have smaller pensions.