Sure, there's a lot of money in banking, but that's not all there is to it. There's a lot of money in Silicon Valley, too, and we don't think Google and Apple are corrupt (just, perhaps, bent on world domination and total control of their customers). Modern-day banking is different. Not only are the incentives set up to encourage risk-taking, but it's apparently difficult if not impossible for bank executives to keep their employees in line.

Take the JPMorgan blowup, for example. Bloomberg recently reported unexplained surges in the volume of trades referencing a Markit index -- that the JPMorgan trade was probably based on -- surged at the end of January and February, just before month-end audits used to determine the value of the trade. In each case, the price moved in a direction that made JPMorgan's trade appear better than it actually was. This activity, which was probably an attempt to mask losses, was only uncovered by the bank's internal review long after the trade blew up.

It's often been said, and it's true, that individual traders have the incentive to take on huge amounts of risk because they enjoy the gains, in the form of large bonuses, but do not bear the potential losses, because there is no such thing as a negative bonus. Bank managers know that, and that's why they have policies in place (capital allocation, risk review, etc.) to keep traders in line. But this example shows that the traders can evade those controls.

How does this compare to other businesses? I used to be an executive at a software company. It's hard to think of how any individual employee could create a large amount of operational risk single-handedly. If a developer cut corners writing code, it wouldn't have made it past our automated testing setup -- assuming it made it past our other levels of code review -- and she wouldn't have had the incentive, anyway. The closest analog would be a sales representative who tried to give a customer non-standard terms to win a deal. For example, promising a product would do something that our development team hadn't signed off on. But we were small enough that every contract was reviewed by plenty of managers to make sure that didn't happen.



This isn't to say Hey, look how ethical software companies are! It's to point out a fundamental difference in incentives at banks versus other firms. In an ordinary company that makes stuff, there just isn't a lot of opportunity to enrich yourself personally at the expense of the company, short of old-fashioned embezzlement.

The same is true of traditional commercial banking. It isn't that hard to set up limits for mortgages or commercial loans and approval procedures for loans that exceed those limits. Sure, plenty of banks have failed, but that's usually because of stupid business decisions made by people at the top--not-unauthorized, self-motivated risk-taking by ordinary employees.