The Wall Street Journal [subscription] reports that the way bankers get paid makes them do things that hurt the economy. They get paid based on closing deals -- e.g., sales volume -- not deal quality or profit.

Gary Becker, a Nobel Prize winning economist at the University of Chicago, achieved distinction for highlighting the ways that people respond to economic incentives. His insights have sensitized me to how incentives have skewed behavior in the recent securitization bubble, and I have posted on this topic for the last year and a half (for example, here, here, here, and here).

But the Journal provides details I had never seen until now. Here they are:

• Mortgage broker gets 0.5% to 3.0% of deal volume based on loan size, types, and terms
• Lender gets 0.5% to 2.5% of loan for selling the mortgage to an investment bank
• Bank/bond issuer gets 0.25% to 1.25% of Collateralized Debt Obligation (CDO) issue
• Ratings agency gets paid by bond issuer to give the highest rating
• Bank CEO gets big pay day even as he departs for making the bad loans

Continue reading Why bankers' pay needs to change

Why bankers' pay needs to change originally appeared on BloggingStocks on Thu, 17 Jan 2008 11:12:00 EST. Please see our terms for use of feeds.