University of Minnesota law professors Hill and Painter came with a better explanation based on sound economics: because of wrong incentives created by poorly designed government regulations. Here's what they propose:
Reckless decisions by bankers led to the financial crisis of 2008. It's often suggested that if bankers were stripped of their bonuses, had their salaries capped and were paid in stock that couldn't be cashed for several years, this would motivate them to act responsibly.
Not so, according to University of Minnesota law professors Claire Hill and Richard Painter. They say such measures miss the heart of the problem.
In a recent paper, Hill and Painter argue that bankers will act recklessly as long as the risks they take don't expose them personally to real financial hardship.
The bankers whose decisions led to the 2008 financial crisis did lose all their stock and stock options. But they kept everything else. Millions from other investments,
summer mansions, jets.
"Once five or ten million is squirreled away from firm creditors," Hill and Painter say, "the rest is funny money." To solve the problem, they propose two ways to make bankers personally liable for their banks' debts.
Bankers who earn over $3 million per year would be required to enter a partnership agreement with their bank. That means if the bank becomes unable to pay its debts, the banker is personally liable. ...
All of a banker's yearly income beyond $1 million would be paid in assessable stock. That means if the bank becomes unable to pay its debts, the banker must pay an amount equal to the value of all the stocks received. ...
"Bankers who profit enormously from their occupations in good times," Hill and Painter say, "should be prepared to share in the costs borne by the public when the risks they take do not pan out."