May 19, 2011
I’m writing in response to the solicitation of public comments regarding section 956 of the financial reform bill passed last year.
Our priority should be to implement this legislation in a manner that is most likely to prevent a recurrence of the behavior and actions that devastated the lives and livelihoods of millions of Americans and countless others in other countries.
Wall Street greed and outrageous pay practices were a KEY contributor to the collapse. Changing Wall Street's incentive structures is therefore absolutely critical to avoiding another crisis in the future.
To achieve this, regulators should use a *safety index* for incentive compensation, instead of a profit index. Currently, most bankers receive stock options. Instead, what if they used the bank’s bond price, which measures the overall ability of the bank to repay its own debt? Another measure of bank stability is the spread on credit default swaps (the insurance-like policies that are essentially bets, where one gambler bets with another that a particular firm will fail). The closer a bank comes to failing (such as in failing to pay of its bond debt), the bigger the spread on credit default swaps.
Thank you for considering my comment,
Francoise Rothstein