Rewarding the financial industry for missteps and passing the buck is inherently wrong, says Leif Pagrotsky.

Question: What is Wall Street’s fundamental flaw?

Pagrotsky: What disturbs me about Wall Street is not that individuals who bet their own money can win if they are smart. What disturbs me is the reward system in general for employed people, that if you take big risks, if you incur big risks for your company, big risks are usually connected with high prices. Then, you earn a big bonus. But when that risk materializes and you lose, you don’t lose. Somebody else loses. Maybe not even your employee. Maybe the taxpayers. I think the bonus system, the way it has been designed in the United States, on Wall Street in particular, has amplified volatility in the markets. It has produced excessive risk taking, it has produced the excesses in lending to people who cannot pay interest on their debts, for instance, and I think that is at the heart of this problem, and when we come out of this, I say ‘we’ because we are the same in my country as well, this must be part of the lesson learned. This is a destabilizing force that should be part of regulation. I’ve had a public debate with the regulators in my country who say that the remuneration system is something between employees and employers in the financial industry. I say it is not. It is a matter for the regulators because the way remuneration is designed is an important element in stability versus instability of these markets, and that cannot be left to market participants alone.