SINCE neither Goldman’s example nor Dodd-Frank and Basel III will change Wall Street’s behavior, we have to find a new mechanism. To my mind, its central feature should be that each of the top 100 executives at Wall Street’s remaining “systemically important” firms be personally liable for the risks they take. Not just their unexercised stock options or restricted stock, but every asset they have in their possession: from their cars to their fancy homes to their bulging bank accounts.
The days of privatizing the profits for Wall Street and socializing the risks must end. As radical as this sounds, in truth it would be no different from when — before 1970 — Wall Street was a series of private partnerships.
I don’t know why this is hard to figure out. Investment bank employees get paid massive bonuses for making big sales/trades/swaps/derivatives/whatevers now. As in, their income depends on what happens this year. If something they created goes bad next year or 5 years from now, who cares, because they got their millions already. And they probably sold it off to someone else, so it’s not their problem. And if they held on to it, well, it really doesn’t matter because they’ll get a government bailout every 5 or 10 years anyway.
There are just no incentives to think beyond the next bonus check. Nothing will change until that changes.