Its not the banks, its the bankers

Good analysis on what creates the unhealthy risk appetite (and a suggestion near the end on how to possibly control it.) [Link]

I learned very early in my business career that the most important factor in managing a sales force is defining the comp plan. Salesmen are smart. They will quickly understand what the comp plan tells them to do and they will do it. You had better make sure that the comp plan tells them to do exactly what you want them to do! Bankers are super salesmen. Bankers are smart. Bankers do exactly what their comp plan tells them to do.

What does a Bankers comp plan tell him to do?

First, understand that bankers are playing with Other People’s Money (OPM). What if they lose it all? Well, it’s not their money. What if they invest it conservatively and make a modest return? They probably get to buy a midsize American car and a 2 bedroom house in a distant suburb. What if they gamble it on really high risk bets and they win? They buy a Bentley and a penthouse condo with a 360 degree view. Understand that, when bankers are playing with the OPM, the comp plan tells them to take huge risks. Heads I win, tails you lose! If I lose all your money I will just play again with someone else’s. There seems to be no end to the people who will line up for the privilege. If I soil one corporate platform I will just jump to another.

Many years ago, when the investment banks were partnerships - they played with their own money. The risk management responsibility was understood by everyone in the firm. It was THEIR money!! Then a really smart generation of managers figured out that they could sell the shares of the bank to investors. This was a blinding insight!!