We bailed out our largest banks because they are too big to fail. If we let them fail the fallout to the global economy would hard to predict. America's chief lawyer explains why he has not brought criminal charges against major banks. According to Eric Holder, they are too big to prosecute. In other words, they are protected by their size, and the consequences of economic fallout, from criminal prosecution. That is why some argue that 21st century capitalism is based upon control fraud. The financial rewards for fraud are very high since it can produce huge profits and bonuses to management. Since it is unlikely that fraud will be prosecuted, the risk-reward ratio encourages even more fraud. Its a no-brainer for many executives.
One of the unintended consequences of the reward system used by our large banks is that it justifies the huge increases that we have seen in the compensation of non-financial CEO's. One of the presentations at the National Bureau of Economic Research, in honor of Martin Feldstein, the conservative economist who had been the head of the NBER, compared CEO compensation to that of Wall Street bankers and hedge fund managers. It was assumed that financial executives compete in the same labor market as non-financial CEO's. Therefore, it is wrong to argue that high CEO compensation is the result of poor corporate governance. CEO compensation is determined by the law of supply and demand in the CEO labor market. If you believe that, I have a bridge that I would like to sell to you.
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