Were Bankers Bonuses a Cause of the Crisis?
Saved from bankruptcy by massive aid from the government, U.S. banks are again in a position to provide big financial bonuses to bankers, although they have been accused in many areas of causing the current crisis to start in the first place.
Critics charge that, in order to gain as large a bonus as possible, bankers took short-term risks and created highly complex banking products which subsequently proved to be fatal for banks and the banking system as a whole.
However, a study by two American professors shows a more complex situation. The study conducted by René Stulz and Rüdiger Fahlenbrach of Ohio State University comes at a time when the debate on the pay of bankers is again in sight of regulators.
The study showed that most bank presidents and directors had large amount of shares in the banks they worked for. If these individuals had perceived a coming economic danger, it stands to reason they would have sold shares en masse before the crisis hit. However, according to the study, nearly all the heads of major U.S. banks have lost a minimum than 30 million dollars, and many much more than this.
So are the large bonuses and the overall incentive structure to blame for the banking meltdown? While one could certainly argue that the search for short-term profit at any cost was a factor, the truth is that bankers were just as incentivized to maintain the long term share prices of the banks they worked at. They simply made bad decisions.