How to Fix Wall Street’s Flawed System of Compensation

“Oceans of ink,” Professor Goodhart said in his speech, “have been used to examine and deplore the incentive and moral hazard effect of deposit insurance, whereas much less attention has been paid to the much more powerful and similar implications of limited liability, especially on those in a position to influence a bank’s decision.” Over the last few decades, Wall Street firms have transformed themselves from small private partnerships into the publicly financed behemoths that we know today. Along the way, they lost the old way of doing things, where the operating capital came from the partners, who faced the ultimate liability for anything that went wrong, including losing their entire fortunes.