…this really [is] a pretty odd situation. Wh[y] doesn’t the market take care of
this problem itself? It really seems like investors would be reluctant
to deal with financial institutions that are organized this way. It
seems like there was a reason the major investment banks were
traditionally organized as partnerships–partnerships don’t have these
incentives, and people should prefer to do business with institutions
that don’t have these incentives. But the market’s not working like
that. And it’s worth trying to understand why. If regulators start
playing cat-and-mouse with compensation shenanigans, the mice are
probably going to wind up winning. But if there’s some specific thing
that’s preventing market discipline from adequately aligning
incentives, we ought to be trying to find out what it is and what can
be done about it.
Here is more.