But it wouldn’t address the other major ongoing failure of our financial system, namely that banks are taking on too much risk, and in the process endangering the entire economy and necessitating occasional bailouts. When the economy gets into trouble those 10 smaller Citibanks will probably all get into trouble exactly at the same time, requiring 10 smaller bailouts, or one large bailout of the “markets.”
It's crucial to remember in all of this that banks are not just victims of economic downturns—they also cause them with their reckless behavior. To stop that government needs to address their compensation structure, not just their size. Bankers today have little financial interest in their banks’ health, which leads them to irresponsible behavior.
The old Wall Street, prior to 30 years of deregulation, was filled with partnerships. Employees were required to keep their money in the company, so if the firm failed, bankers failed, resulting in a degree of self-policing. Wall Street bankers were personally invested in the strength and integrity of their decisions, because if they went wrong, they themselves lost big.
Bankers today get paid mostly in cash bonuses. Many on Wall Street, certainly those who work at the big banks, have a fantastic win-win deal: They get paid if they win and they don’t have to give anything back if they lose. Often, the incentives are actually structured to encourage taking on reckless levels or risk.
That was certainly the case during the run-up to the financial crisis 10 years ago. Not only did nobody go to jail for the crisis, not only did few lose their jobs, but the real dirty secret of Wall Street is that many of the bankers did very well because of it. I know: When Citibank was plummeting towards bankruptcy I assumed I would lose my job. When our stock fell below three dollars per share, I texted my wife, “ready to become farmers?” I didn’t have to become a farmer, and neither did anybody around me. Thanks to a government bailout, not only didn’t we lose our jobs, but we also got paid well over the next few years. Really well.
The crisis was good for many bankers, and not just the ones who bet against housing blowing up like in The Big Short, but for many who had behaved recklessly, and were responsible for the crisis. Including some of the CEOs of banks that got bailed out or blew up. That needs to change, by forcing bankers’ compensation to be locked up in the company and letting them know they will face prosecution for any crimes.
Both are central to a word that didn’t appear in Kashkari’s speech: fairness. A system that bails out bankers, that doesn’t impose costs on them (money or jail), and actually rewards some of them, is simply unfair. Breaking up the banks won’t stop the bailouts, because banks are still incentivized to behave badly, and that’s true if it is one big bank, or 10 small banks. Bankers, when they fail, need to lose their money, their jobs, and sometimes, their freedom.