Instead of Capping Pay, Could the Government Police Banks’ Risk Models?

stop sign; via Flickr

Question: Instead of the government trying to prevent risky behavior by limiting bonuses and other compensation for the best performers in the finance industry, would it be possible for the government to review risk models that banks use?

Paul Solman: Possible? Sure. But which would you think more meddlesome? More likely to be effective?

Look, I get the problem with the government taking over big banks. Potentially, it’s an administrative nightmare. But if I’m the major shareholder of a bank, I can’t decide how much to pay the executives?

The data I’ve seen appear to be unequivocal: There’s no correlation between executive pay and executive performance. And I don’t believe the U.S. government would have a problem getting very competent people to run the banks it has a stake in. Or let me put it more carefully: I don’t believe it would have a problem getting people at least as competent as those who DID run them. And were paid queen’s ransoms for doing so.