Tackling Wall Street Compensation

John Carney has written two good posts (here and here)
this weekend on Wall Street compensation. In the first he pointed out
that compensation policies really weren’t to blame for the crash and in
the second argues that any attempts to reduce compensation will likely
result in perverse and unintended results.

I am inclined to agree with the gist of his arguments, however, I
think that there is another way to attack this beast that leaves it up
to the owners and employees of these firms to sort out the issues.

Quite clearly, giant financial institutions that pose huge systemic
risks are not going to go away and they are going to continue to be too
big to fail. We might as well stipulate to that fact up front. These
firms have too much political power to be dismantled and the
dismantling would likely take decades even if we had the will to try.
Therefore, the best way for society to deal with the threat is to
require them to maintain a cushion against loss that is sufficiently
large so as to minimize the overall cost of any future bailouts.

The easiest way to do this is to impose very large capital
requirements. Since we should have by now convinced ourselves that
mathematical models of risk are inherently untrustworthy, the capital
requirements need to be based very simply on size. The bigger you are
the more capital you’re going to have to maintain.

How much? I don’t have a magic answer but I think our recent
experience can point towards some numbers. How much did we have to pony
up to rescue Citi for example, to get

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