2012/13 THIRD QUARTER FINANCIAL STATEMENT ANNOUNCEMENT

Asymmetric and flawed incentives that favor risk hiding in the tails. There were three primary flaws in the compensation methods that led to artificial earnings and not adequately and appropriately risk-adjusted compensation. They are a) asymmetric payoff: upside, limited, or no economic downside (a free or underpriced option); b) flawed frequency: annual compensation for risks that blow-up every few years, with absence of claw-back provisions; and c) misattribution: compensation for returns that are an attribute of the market (e.g. incentive fees that do not control for market beta or baseline risk premia), or an attribute of the organiza- tion (compensation for...