What if corporate decision makers lost money when they made bad decisions?

Back in January, criticizing the Supreme Court decision equating the free speech rights of corporations with those of individuals, I pointed out the insanity of considering corporate and other business entities as rational actors of the sort many economists consider people to be. The problem is that corporate decisions are made by individuals and are therefore driven to benefit those individuals, not the corporations (and their shareholders). As I wrote:

Individuals at AIG were making individual fortunes based on the income they were bringing into AIG for selling credit default swaps. Those individuals were making and would retain those fortunes even if, as turned out to be the case, AIG might not have sufficient funds to pay off the obligations those credit default swaps imposed on AIG. In other words, if one treated AIG as a rational person, one would suppose AIG would never expose itself to a real risk of obligating itself to pay more than it had in reserve. But AIG is merely a corporation, and the individuals actually making the decisions on behalf of AIG had every incentive to get what they could, subject AIG to irrational risk, and be able to walk away with their tens of millions of dollars.

I wasn’t just engaging in paranoia. I spent too many years with investment bankers to entirely forget their reality. And I have data to back me up:

In a study late last year, three Harvard Law School researchers examined public documents to assess whether one “standard narrative” of the crash was true — that “the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives.” It turned out to be a fairy tale. “In contrast to what has been thus far largely assumed, the executives were richly rewarded for, not financially devastated by, their leadership of their banks during this decade,” the Harvard Law team wrote. The top five executives at both Lehman and Bear collectively took home $2.4 billion in bonuses and equity sales — that’s nearly a quarter-billion dollars each — between 2000 and their 2008 demise.

Last week, William D. Cohan made much the same point in connection with the entire Wall Street ethic:

What if the biggest rewards on Wall Street went to those who thwarted dangerous and excessive risk-taking instead of to those who enabled, approved or simply ignored it?

What if every senior Wall Street executive had to worry that he could lose his entire net worth at any moment — including his mansions in Greenwich, Conn., and Palm Beach to say nothing of his job — if the revenue he was generating turned out to be unprofitable or excessively risky?

Wouldn’t that combination of potential rewards and fear of calamitous personal loss instill in every Wall Streeter a zealous desire to insist that the products his firm was peddling were safe for others to buy?

If such simple incentives had been in place on Wall Street, wouldn’t the latest crisis — as well as the multitude of others that have been perpetrated on us in the past 25 years — been largely avoided? . . .

The obvious answer to these questions is that human beings always do what they are rewarded to do and always have, especially on Wall Street. Rewarding prudent risk-taking on Wall Street while punishing recklessness would result in a new ethic on Wall Street, one not solely driven by generating as much revenue as possible in a given fiscal year with no regard to the long term.

To that end, shareholders must demand that corporate boards of directors revamp the entire compensation structure on Wall Street away from one based on revenue generation to one that rewards long-term profits. For goodness sake, what other business on the face of the earth, aside from Wall Street, pays out between 50 percent and 60 percent of each dollar of revenue generated to employees in the form of compensation!

And yet the Wall Street Journal’s stance on financial reform is the same as its stance on health care reform: “Once ObamaCare becomes law, the next big legislative rush is going to be for financial reform, but as we look at Senate Banking Chairman Chris Dodd’s latest draft we can’t help but wonder: Why the hurry?”

Indeed, why? There’s money still to be made . . .