The Five Dumbest Things on Wall Street: March 20

1. Bailout Nation

Few things are more pathetic than watching the titans of Wall Street morph into the world's largest welfare case when good times turn bad.

These are the same characters that routinely sing the praises of the free market and justify their excessive compensation levels by pointing to the big risks they take.

But as we saw when the failed, former leaders of Citigroup C, Merrill Lynch MER and Countrywide Financial CFC floated off on golden parachutes, there's no real incentive for finance chiefs to avoid taking dumb risks with their shareholders' money.

That's what former Citi CEO Chuck Prince was talking about at the height of the housing bubble when he told the Financial Times that "as long as the music is playing, you've got to get up and dance-- we're still dancing." Prince lost his job when the music finally stopped, but he still danced away with a $10 million bonus, $28 million in unvested stock and options and $1.5 million in annual perks.

When Wall Street inevitably runs amok, its broken incentive structure gets far more ridiculous as government comes running to the rescue faster than you can say "moral hazard." That was the case in the savings and loan crisis of the 1980s and countless other episodes throughout history, and sure enough, that's the case in the housing and credit crisis of 2008.

Last weekend, the Federal Reserve didn't just take responsibility for $30 billion in hard-to-trade securities from Bear Stearns BSC and force JPMorgan Chase JPM to buy the floundering investment bank with just a cursory exercise in due diligence on highly unusual terms. The central bank also agreed to accept some $436 billion -- more than half its entire balance sheet -- in highly suspect securities from Wall Street, potentially putting U.S. taxpayers on the hook for them.

The Fed has not taken such an interventionist role on Wall Street since the Great Depression. Regulators explained their actions by saying the alternative was a breakdown in the nation's financial system that could have wrought untold misery on us all. Fair enough, they should recognize that it was yesterday's laissez faire hypocrisy on the part of today's welfare recipients that made the financial system as fragile as it is now.

Last week, U.S. Treasury Secretary Hank Paulson proposed a raft of new regulations on the mortgage industry that his administration and its allies in Congress have opposed for years -- like nationwide licensing standards for mortgage brokers. The former Goldman Sachs GS CEO happily proclaimed that new legislation wouldn't be necessary to enact them. In other words, these common-sense rules were available to the Bush Administration when the housing bubble was building, but it neglected to enforce them at Wall Street's behest.

Dumb-o-meter score: 95. At this point, better never than late.