Kass: Under-Regulated, Overcompensated

This blog post originally appeared on RealMoney Silver on Sept. 15 at 7:44 a.m. EDT.

At the core of financial system's current breakdown is the fact that there remains too little, not too much, financial industry regulation. Too many regulations serve little or no purpose (similar to the pages of silly and lengthy disclosures in Wall Street research reports that few read and even fewer rely on). Regulatory enforcement is arbitrary and, at times, unpredictable -- a system that values form over substance.

Over the past decade Wall Street's compensation was no longer calculated on multiple years of contribution/performance but rather became a short-term (meritocracy) calculation based on a one-year profit and loss statement. The extraordinary compensation at hedge funds, private equity, and in the investment and commercial banks became a "heads I win, tails I win" proposition as a star system emerged that was based on contributions calculated within reduced time frames rather than an assessment of the value-added contributions over lengthy periods of time (subject to high water marks and claw backs).

Importantly, supporting my view of a "heads I win, tails I win" structure, outsized annual compensations were typically not retained but rather were allowed to exit Wall Street every year -- in part, helping to explain the appreciation in home prices between 1995 and 2005 on the East and West Coasts.

A general lack of regulatory scrutiny and enforcement, the absence of risk controls and a continuum of reckless management decisions at the world's leading financial institutions (banks, brokers, hedge funds, private equity, etc.) have combined to create a Black Swan event, which has resulted in a credit market gone amok and a shadow banking system often under the radar of regulators.