Why Goldman Sachs Should Implement a Clawback Mechanism
Raghuram Rajan attacks banks' compensation systems in the in the FT, to applause from Yves Smith, Alea, and Alexander Campbell. The problem, says Rajan, is that bankers get paid enormous sums of money for generating "fake alpha": profits which will go up in smoke next year and transmogrify into even more enormous losses. Rajan's solution? A clawback mechanism, under which a big bonus would have to be given back in the event that it turned out not to be properly earned.
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