Sunday, January 04, 2009

Tales from the Meltdown 9: Perverse Incentives

Michael Lewis and David Einhorn on why the financial world is doomed to repeat its mistakes. Shorter version: compensation is based on pushing the limits of the envelope, taking more risk and higher leverage. The financial system will therefore blow up again, because nothing has changed.

They don't stop there, but recommend six important fixes, ranging from new capital requirements and CDS regulation to moving from firefighting mode to strategic thinking when considering regulation.

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