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[Tyrone Slothrop]

Originally Posted by sebastian_dangerfield

It was musical chairs. "This is going to scorch a lot of folks... but not me." Or, "This is going to scorch a lot of folks, but I'll have made so much money in the interim, I'll be alright if it scorches me."

One thing I don't think anyone at a bank in 2007 thought was:

"This is going to scorch a lot of folks, but when it does, the govt will bail people like me out and I'll wind up only losing a year or two of big bonuses, and I'll make multiples of that loss in the stock market from a crazy run-up fueled by liquidity and MBS purchases the Fed uses to cure the problem I was involved in creating. I can't lose!"

But they do now.

Lots and lots of people at the big banks thought those things in 2007. The banks' names stay the same, but the people at them who make a lot of money turned over quite a bit. In fifteen seconds on Google I found this, from the NYT in 2009:

The “I.B.G. – Y.B.G.” problem. A major cause of the current crisis will most likely prove to be a mismatch of incentives for Wall Street traders. If a mortgage trader made a big bet, he had the chance to land a big bonus if it paid off (and his boss did, too). If, however, that bet didn’t pan out — and the trader lost a lot of money for the firm — he might receive no bonus at all. On the contrary, he might get a princely severance package.

But one thing seems pretty clear: That trader would not receive a “negative bonus.” In other words, he did not personally incur the cost of the trading blowup. Indeed, the open secret on Wall Street was that traders did not risk losing their own money — just the chance of receiving an enormous payout.

Economists call this a moral hazard problem. In bankerspeak, it’s known as the “I.B.G.-Y.B.G.” issue — as in “I’ll Be Gone and You’ll Be Gone” if the trade goes south. As one senior Wall Street executive recently told me: “Compensation was a one-way option for the trader, with the firm bearing all the risk.” Today, the American taxpayer is sharing that burden as well.