The problems with the compensation on Wall Street is its structure rather than its amount.
The entire financial system is riddled with agency problems, in which one group delegates responsibility to another, which in turn delegates to another group.
There are times when shareholders and traders align to destructive effect. 186
187 for remedies of compensation problem
(1) mandate a longer period of holding the shares of the firm
(2) when paying out the bonus, take into consideration the long term return of the securities
(3) let the bonus be what traders sell
ways to fix System of securitization
(1) force financial intermediaries to hold some of the MBSs and CDOs that they create (it is proven to be not very effective)
(2) standardization of securities page 193
Rating agencies are now paid by issuers of debts
page 197
A derivative is simply a bet on the outcome of some future event.
Counterparty risk: the chance that the institutions that had sold credit default swaps would be unable to make good on their promises, particularly during a systemic crisis. In effect, the risk created a financial system that was not only too big to fail, but also too interconnected to fail.
Basel I (Basel Capital Accord) asked banks to differentiate between the various classes of assets they held in order to better assess the relative risk posed by holding them.
Basel 2 has serious flaws: it assumed that the world's financial system is more stable than it actually is.
The crisis underscored several realities:
(1) banks need more higher-quality capital
(2) the "capital buffer" that many banks have established is not large enough to shelter them from the crisis
(3) the quality of the assets may deteriorate fast
page 210 important
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