“The reason for the rescues during the crisis, such as AIG, or the TARP injections to forestall failures, was not to protect depositors of banks or the FDIC insurance fund. The reason was rather to avoid a chain reaction of failures set off by interconnectedness. Furthermore, this need for rescue does not depend on what activity gives rise to the potential bank failure. We will have to rescue banks whose failure will endanger other banks even if these failing banks are engaging in traditional activities. Mr. Volcker seems to imply that it is acceptable to rescue banks engaging in traditional activities. I disagree. Quite frankly, I do not think a taxpayer would feel better about rescuing a bank that made risky loans than he would rescuing a bank that engaged in less traditional risky activity.”
Hal Scott testifying before the Senate Committee on Banking, Housing, and Urban Affairs on Feb. 4 regarding the Volcker Rules, which aim to address some failings in the financial regulatory structure brought to light by the recent financial crisis
“Standard compensation arrangements in publicly traded firms have rewarded executives for short-term results even when these results were subsequently reversed. Such arrangements have provided executives with excessive incentives to focus on short-term results. … In financial firms, where risk-taking decisions are especially important, rewards for short-term results provide executives with incentives to improve such results even at the risk of an implosion later on.”
Lucian Bebchuk LL.M. ’80 S.J.D. ’84 testifying before the House Financial Services Committee at a hearing titled “Compensation in the Financial Industry” on Jan. 22
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