William D. Cohan is the author of Money and Power: How Goldman Sachs Came to Rule the World (2011).

The main problem with Wall Street isn’t that, as Bernie Sanders says, the banks are too big to fail. It is that the bankers who run them are too big to nail—to be held financially and personally liable for the bad or corrupt decisions they make. This is now, sadly, documented history. The heart of the subprime mortgage mania—the real reason it could go on for so many years, nearly sinking the world economy in the end—was that no one was really held responsible for any of his or her bad decisions. Ever.

Bank executives weren’t held responsible during the bubble as it was building, when banks stopped caring about their own mortgage lending standards because the bankers knew all those bad loans would be bundled into securities that could be sold around the world, thus relieving the bankers’ firms of liability (though many banks also fecklessly kept substantial amounts on their books). Executives weren’t held responsible during the crash, when they were bailed out by the federal government and barely had to promise any change of behavior in return. And they weren’t held responsible long afterwards, when the Justice Department and the SEC failed to convict (and barely put on trial) a single senior executive, or even to send any to the poorhouse by levying fines and penalties. No personal accountability whatsoever, from start to finish; on the contrary, bankers, traders and executives were rewarded for their reckless behavior with big bonuses. Is there any better recipe for encouraging more greed, mania and irresponsibility by Wall Street—no matter how big the bank you’re working at is?


Federal regulators are gradually trying to get at this problem; on Thursday, they proposed new rules under the 2010 Dodd-Frank law intended to prevent executives at businesses with more than $1 billion of assets from earning “excessive” pay that encourages too-risky or aggressive tactics. The idea is to require the nation's largest banks and financial firms to hold back executives' bonus pay for longer than before—and require a minimum period of seven years for the biggest firms to "claw back" bonuses if it emerges that an executive's actions have hurt the institution.

But regulators need to go much further than this modest proposal and once again require—as in the long-ago days of private partnerships—that senior Wall Street executive put their entire personal wealth and holdings under threat of confiscation. In plain language, in the event of a bankruptcy, a bank’s bigwigs would be legally required to turn over to creditors or shareholders, until they are made whole, title to scores of Fifth Avenue co-ops, homes in the Hamptons or Palm Beach, or wherever they may be, plus brokerage and bank accounts filled with their accumulated billions. At the moment, of course, no such legal provisions exist. In fact, the whole purpose of a corporate structure is designed to shield executives from liabilities and make them the responsibility of creditors and shareholders.

But that protection can change–in fact should change—either voluntarily by a board of directors, or by federal regulators demanding it. Something very similar to this requirement already exists in the United Kingdom where, since March 1, senior bank executives are held personally liable for things that go wrong in their direct chain of command. In the United States, the big banks’ prudential regulators at the Federal Reserve could require this accountability just as the Financial Conduct Authority now does in the U.K.

Needless to say, this would not be a popular provision on Wall Street. But there is no question that this is the level of accountability that is required to make sure the leaders on Wall Street never again allow the behavior that occurred in the years leading up to the 2008 crisis to happen again.

In other words, the long-term solution to the causes of the 2008 financial crisis lies less in breaking up the nation’s largest banks—an idea that seems to be all the rage these days among some politicians and regulators, especially since many of the banks failed their “living will” test a couple of weeks ago—than in changing the behavior of the people who run and work at those banks.

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Like nearly everyone, people on Wall Street do what they are rewarded to do, and these days that means taking big risks with other people’s money. That is exactly the same reward system that existed on Wall Street leading up to the financial crisis, and nothing in Dodd-Frank, the Volcker Rule or Basel III (higher capital requirements) has changed that fact. Where once upon a time when Wall Street was comprised of small, private partnerships, the business models on Wall Street were designed to take prudent risks with partners’ money in hope of generating pre-tax profits that could be distributed to the partners, today—with all the big banks on Wall Street being publicly traded companies—the rewards go to those bankers, traders and executives who generate the most revenue, not the most profit. That reward system has led to one financial crisis after another in the late 1980s, 1990s and 2000s, culminating in the 2008 disaster.

Unlike the idea of breaking up the big banks or making sure they have orderly liquidation plans, changing the incentive system on Wall Street is relatively easy to accomplish. All that is necessary is for a Wall Street CEO and his board of directors to have the courage to design and implement a new compensation system that along with rewarding revenue generation, also rewards ethical and moral behavior and makes sure that bankers, traders and executives are held accountable where it counts – in their bank accounts – when things that they do go awry.

Laughable, you say, to expect Wall Street CEOs and their handpicked board of directors to change the existing compensation that’s all gain and no pain to one of ultimate accountability? But actually this solution is one the executives know well from the past. During the partnership era of Wall Street, which comprised by far most of its history, Wall Street partners were liable for mistakes made at their firms up to their entire net worth. Why not simply take a page from that bygone era and revamp the current compensation system to require more economic accountability? If Wall Street won’t do it itself, well, then the regulators can, and should.

Will anyone step up and propose the first radical redesign of the Wall Street compensation system since the 1980s, when Wall Street’s private partnerships were transformed into publicly traded behemoths and the partnership culture on Wall Street was replaced by a bonus culture? So far, the answer has been no. It won’t be possible to return the big banks to a series of private partnerships of course, but it is possible for the subset of, say, the 500 top executives at each firm – those who get paid the most, those who decide who gets promoted and those who decide what business lines the bank should be in and how capital gets allocated – to be fully liable on a daily basis for their entire net worth should something go wrong at the bank during their stewardship of it.

And there’s another reason to make this idea the primary focus of future reform. While breaking up the banks seems to be gathering political steam, in practice there’s less of a need to do so. The market is already working its magic by forcing them to get out of various business lines that are no longer profitable in a post Dodd-Frank and Volcker Rule world. And there is evidence that Wall Street has abandoned certain activities– commodities and proprietary trading, for instance—under the demands of the Volcker Rule. Many executives also appear to have decided that with the new capital requirements mandated by Dodd-Frank and Basel III, it is no longer worth their while to make deep markets in corporate bonds, as banks once did.

What is less clear, however, is whether the big banks have actually gotten bigger since the financial crisis, as Bernie Sanders and other politicians and regulators would have us believe. According to Federal Reserve statistics, at the end of 2015, the five largest domestic banks controlled 48% of the domestic banking assets; eight years before, the top five domestic banks controlled 49 percent of the domestic banking assets. (In an April 10 blog, Robert Reich, the former Clinton-era Labor Secretary and an avowed Sanders’ supporter, makes the point that the top five banks today are bigger–controlling 44 percent of all the assets– than in 2008 when they controlled 30 percent of all the assets. Reich’s numbers, which are not footnoted, obviously don’t jibe with the Federal Reserve statistics.)

In any event, the truth is that a lot of energy is being wasted debating something of little consequence if the goal is to try to prevent the kind of financial cock-up that Wall Street, and others, delivered to world’s doorstep in the fall of 2008. Whether the top five banks control 50 percent of the banking assets or 60 percent of the banking assets or whether they have the right kind of “wind-down” plan to satisfy the requirements of Dodd-Frank is irrelevant to what really drives behavior on Wall Street.

It’s said nothing focuses the mind like an execution. If you want real, lasting change on Wall Street – as people like Sanders and now even Hillary Clinton seem to want—then make its leaders personally liable for things that go wrong on their watch. The rest of the ideas floating around about how to change Wall Street behavior are just noise.