It's not owners, but counterparties that keep banks in line

Alan Blinder has an op-ed up at the WSJ asking what to do about crazy Wall Street compensation schemes. He misses a key point: No one ever expected financial institution shareholders to be sophisticated and coordinated enough to properly monitor management decisions. The question is not why owners didn't keep managers from blowing up their firms, the question is why counterparties -- who undoubtedly understood how the game was being played and who was likely to end up eating their risky bets -- were willing to trade with ticking time bombs.