The NY Times editorializes on the Bears Stearns situation and wonders why top financial executives aren't asked to give their bonuses back:
Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless — or not, if the Fed feels it must step in. But as a rule, they won’t have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.
The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers’ appetite for walking a tightrope. Some economists have suggested making their remuneration contingent on the performance of their investments over several years — releasing their compensation gradually.
That’s an idea worth studying. Certainly, trying to put specific limits on bankers’ salaries is a nonstarter. But until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.
I agree that they are describing a real problem, which is more accurately aligning the interests of the financial services "producers" with shareholders and risk regulators. But why pick only on the top execs? Somewhere in our glorious country is a mortgage broker who put lots of folks into crazy mortgages, flipped the mortgages to eager investment banks, and drove off in her Porsche, which she still has (with gas at $3.50/gallon - hah!).
On the other hand, the private market solution would be for investors to deal only very cautiously with investment firms whose salesman and deal originators do not have their own net worth tied up in the firms; as they promote various transactions such salesman would be inclined to mull the long term reputation of the firm and the long-term viability of specific deals, as well as their next commission check.
So is it back to partnerships? Goldman Sachs (not a partnership, but sort of) has done well in this recent debacle, and the Goldman partners routinely have kept most of their net worth tied up in the firm, even after it went public (or so I believe; blame their great PR machine if I'm wrong). That said, Bear Stearns employees also were encouraged to keep their money in the firm, and how did that work?
Oh, well - no politician ever lost votes for blaming Wall Street, but there were some very savvy investors who get suckered by this sub-prime mess, just as there were some very savvy investors who were suckered by the internet bubble, or the LTCM meltdown of 1998, or the high yield bust of the 80's, or the REIT bust of the 70's, and so on back through history.
Not many people on Wall Street are paid to say "no" to deals; not concidentally, it is hard to evaluate the bottom-line impact of deals denied.