Fixing Wall Street

http://opinionator.blogs.nytimes.com/2010/10/07/make-wall-street-risk-it-all/?emc=eta1

***************

"Over the last 35 years ... payroll employment in San Francisco has dropped by 50%, but self-employment has shot up 150%, including a large number working in software, consulting, video games, and other high wage professions." (Joel Kotkin)

***************

William Cohan's post in "The Opinionator" yesterday reflects my position on almost everything that's happened since 2007 on Wall Street.

To quote Cohan: "The 2,200 page Dodd-Frank Act, which President Obama signed this summer, creates an Orwellian alphabet soup of new agencies, oversight boards and offices intended to protect us from ourselves.

The problem is that since the incentives on Wall Street have not been changed one iota by the new laws - nor are they likely to be changed by any of the soon-to-be-written regulations of federal agencies - we're no better protected from bankers' potentially reckless behavior than we were before the latest round of reforms."

The key word is "INCENTIVES." People will do what they get paid off for. The really well done behavioral studies endorse that position. Getting huge bonuses for recirculating subprime mortgage CDOs (aka toxic trash) creates no actual product nor pays for any actual result of value. By contrast, huge bonuses for saving a company (and the "jobs" implied by that) are "worth it."

For the more sophisticated financial types, the new Basel III capital rules which will require banks to hold more "capital" (common equity up from roughly 3% to 7%), don't change the incentive plans of the folks who manage the banks.

It is interesting to note that on Wall Street 50% of every dollar of revenue generated is paid out to employees in the form of compensation. Really. Why? The Dodd-Frank "say on pay" is a shareholder right that is "non-binding" on any company. So there is no improvement in shareholder rights to amend outrageous pay practices.

Cohan's suggestion that the Top 100 executives at Wall Street's "systemically important" firms be personally liable for the risks they take gets at the issue of accountability. His quote on the fact that the days of privatizing the profits of Wall Street and socializing the risks must end suites the situation perfectly.

Fix the incentives - fix Wall Street.