Banks Shirk Subprime Responsibility

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Failing Is Not the Same as Failing

As usual, pervasive cultural phenomena reach their apex on Wall Street. Last year was a financial horror show. Three of the biggest Wall Street banks suffered the worst quarterly losses in their histories. Shareholders lost more than $80 billion, according to Bloomberg. Yet Wall Street's five largest firms paid a record $39 billion in bonuses for 2007, up from the previous year, when they had logged their biggest profits ever. And that $39 billion figure isn't simply plumped by winners like Goldman Sachs either. Morgan Stanley's bonus pool rose 18 percent last year despite historic fourth-quarter losses.

Wall Street bosses used to justify paying big bonuses by arguing that they had no choice if they wanted to recruit top talent. Now the distinction between those who get it right and those who don't no longer exists. Failure is the new success. Traders face asymmetrical choices: massive upside if they win while wagering other people's money and zero personal downside if they lose. It doesn't matter what happens to the company as a whole. As Harvard finance professor Randy Cohen explains, the way an employer would get maximum effort is to offer what's known as the "cement shoes" contract. If the employee does well, he becomes wealthy; if he doesn't, he's killed. Try finding someone to take that job. The rational employee will take a lower upside if promised something in the event of bad luck or failure.

"Attracting talent by guaranteeing they will make good money matters a lot more than incentivizing them by saying, 'If you screw up, you'll be panhandling,' " Cohen says. "Markets are not in the business of doling out proper rewards for morality."

Sure, there seem to have been sacrifices. We can bow our heads for Citigroup's Chuck Prince and Bear Stearns' James Cayne, neither of whom is likely to get another top job anytime soon. (Of course, we thought that about Nardelli too.) John Mack, Morgan Stanley's C.E.O., decided to go without a bonus in 2007. But such examples are only superficially consequential. Mack was paid more than $40 million in 2006 even though he encouraged moves that led to losses the following year—and beyond. As the Financial Times' Martin Wolf has pointed out, the calendar is an astronomical, not economic, phenomenon. Bankers shouldn't be paid based on the arbitrary rolling over of the year.

Eat, Drink, and Be Merry, for Tomorrow We Make More Money

When Cerberus Capital Management chose Nardelli to serve as the head of Chrysler, it gave us our patron saint of No-Consequences. Nardelli arrived at Home Depot ablaze with ideas about financial efficiencies but with little feel for his customers, suppliers, or employees. He bounced into one of the most delicate roles in American business, helming a company that is a symbol of the country's grand manufacturing past as well as its decaying present.

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