This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Did Wall St. Bonuses Cause the Financial Crisis?

By John Carney, Senior Editor at

NEW YORK ( CNBC) -- Did the bonus system on Wall Street cause the financial crisis? Are bonuses still putting our financial system at risk?

An affirmative answer to those questions is the underlying thesis of Nassim Taleb's op-ed in the New York Times today. Taleb, the financier famous for authoring "The Black Swan," proposes ending bonuses for all systemically important financial institutions: the Wall Street banks, some insurance companies, the biggest hedge funds.

Taleb is probably one of the smartest people I've ever encountered.

I've learned more from Taleb and his books than almost any other living thinker. Most people misunderstand the lessons of The Black Swan which is a great frustration to him. He wrote a book that tried to explain that we need to make ourselves less vulnerable to unpredictable shocks -- and people instead went around trying to predict the next shock to the system. They missed the point about unpredictability, about the limits of our knowledge of future events, altogether.

More from CNBC
Wall Street Unimpressed With Republican Candidates
Home Prices Still Falling, and Not Just Foreclosures
Happy Holidays in Store for Videogame Makers

A single walk with Taleb through the streets of Brooklyn changed my life in very profound ways. I eat, walk, and see differently. Eat more but simpler foods, walk more slowly, never rush to catch a subway, look at the street scenes I pass rather than just pass by on the way to my destination.

Taleb avoids the simple thesis on bonuses. The simple thesis is that bankers have an asymetric exposure to the risks they take that encourages them to take on so much risk that they put their firms at risk. If they take risky bets that pay off, they get big bonuses. If the bets destroy the firm, they are none the worse for it.

The problem with this simple thesis is that it runs contrary to the behavior of actual banking executives at the firms that failed in the financial crisis. The CEOs of Bear Stearns and Lehman Brothers, for example, each lost more than $1 billion when their firms collapsed. This was far in excess than what they made selling stock of their firms in the years preceding the crisis, as scholars Jeffrey Friedman and Wladmir Kraus point out in their book, Engineering the Financial Crisis.

If Dick Fuld and Jimmy Cayne knew they were risking their firms, they surely would have taken much more money off the table by selling nearly all stock they owned in their firms. It makes no sense to say that they risked over a billion dollars in downside risk for tens of millions of dollars in upside gains.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs