Gillian Tett in today’s FT

Why have so few bankers gone to jail in the wake of the financial crisis…Why….  Bernard Madoff (is) now sitting in jail, while all those faceless people who conjured up subprime loans or dodgy .collateralized debt obligations are not?

……To be sure the financial industry is dangerously powerful; and some bankers have behaved in ways that were immoral. But whether (they) have actually broken the law is less clear cut.

If you look closely at those clever financial products that were conjured up……..a defining feature was that they were intended to exploit loopholes in the legal system. “Innovation” was thus about dancing on the edge of laws, regulations and ratings- but not breaking any rules.

…………….(This) is bad for long-term social..stability. One benefit of ..trials is that they create a sense of….justice. Without any …retribution, there is a risk the anger will fester. That is what is happening now.

                                Alan Greenspan (recently commented) that he did not “know any senior bankers who have declared personal bankruptcy

And there’s the rub: as long as bankers not only avoid prison but remain better paid than everyone else….Americans will feel the situation is…….”wrong”.

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End of excerpt.

And of Ms. Tett’s analysis. Pity because she could have touched another base. Clearly one reason Greenspan and the whole regulatory apparatus were asleep at the switch was that we hadn’t had a good old fashioned financial crisis since WWII.

And perhaps one reason for that was that until the late 70s the marginal tax rate was 90% which meant that no banker could count on just one year’s bonus to be his ticket to early retirement. Or rather not so much untrue as purely theoretical. No board would approve a bonus high enough so that 10% was enough for a life time in the Grand Cayman. If the idea crossed their minds they rejected it because the share holders would have rejected them for awarding compensation 90% of which would be mailed to the IRS. So in those stodgy pre Reagan days boards didn’t approve mega bonuses, bankers didn’t get them ,AOBTW bankers didn’t cut deal that might risk their bank’s existence. Because they were going to need it next year.

When the marginal rate dropped into the 30% it was a whole new ball game. Not only did that  leave the bonus baby with  two thirds of his hard earned  reward (instead of 10%, let's say 7 times as much),it also made it rational  for boards to approve a larger gross bonus. So the pot got bigger and the cook's share was 7 times higher  of that larger amount. And his concern for the future of the bank went down.

Yeah I know. Loyalty. If you're looking for loyalty as my old grandmother used to say, try the dictionary. Under L.

Which leads to a suggestion for an alternative to crafting a new set of regulations which a new set of bankers will try and succeed  to Innovate around-until the next crash. Instead, a simple minded way to reduce risky banking would be to bring back the good old fashioned 90% marginal tax bracket.

Be good for the deficit too. Probably actually  better than cutting Head Start.