Please ensure Javascript is enabled for purposes of website accessibility

An Ingenious Way to Pay Bankers

By Morgan Housel - Updated Apr 5, 2017 at 7:54PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You break it, you buy it.

Not all of them abused the system, but Wall Street bankers and traders could earn Croesus-like compensation packages in the past years by piling full-throttle into whatever was hot -- subprime, CDOs, commodities, whatever -- and collect an enormous bonus before the shoddiness of their creations became apparent. You know it's coming … "That's the way we do it. Get your money for nothing and your chicks for free."

Take former Merrill Lynch (NYSE:MER) CEO Stan O'Neal. You think he gives a hoot about mother Merrill's plunge in the past year? He rode off into the sunset with a $160 million golden parachute before things hit the fan. Same goes for an AIG (NYSE:AIG) derivatives executive, who was allegedly paid $1 million a month for consulting even after his division imploded. As Thomas Friedman put it, Wall Street rode on the I.B.G. Principle: I'll be gone before the bill comes due.

Not anymore.

Credit Suisse Group (NYSE:CS) found an ingenious way to solve this problem: It's paying yearly bonuses to some of its top bankers not with cash, but with the same leveraged loans and commercial mortgage-backed debt that have crushed the financial system. If the securities plunge in value more than they already have … eh, that's their problem. They created them; they're responsible for the outcome. You break it, you buy it.

While the idea might not stick, it seems devilishly smart in terms of aligning bankers' and traders' interest with the products they peddle. With banks like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) relying on an outsized chunk of profits from internal investing and trading, it doesn't seem crazy to demand that employees who're paid like gods put a little long-term skin in the game.

I really hope this style of compensation starts to take hold. One of the biggest reasons we're in this mess is the result of a ludicrous compensation system that praised anyone with the gall to take stupendous amounts of risk without any consideration to the consequences of that risk. After a while, it became what was probably the most extreme case of moral hazard in history. Fix the compensation problem alone, and you'd do more to overhaul a broken financial system than any number of bailouts could do.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. The Motley Fool is investors writing for investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Credit Suisse Group AG Stock Quote
Credit Suisse Group AG
$5.86 (2.63%) $0.15
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
$353.82 (0.61%) $2.14
Morgan Stanley Stock Quote
Morgan Stanley
$91.66 (1.62%) $1.46
American International Group, Inc. Stock Quote
American International Group, Inc.
$57.41 (1.92%) $1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.