"As long as bankers live in a world free of consequence, our finance system is doomed to fail"

In a must read Guardian column, Joris Luyendijk looks at the implications for our financial system of bankers being free of both market discipline and legal liability.  When greed is not checked by the consequences of failure, you get a dysfunctional system where bankers privatize the gains and socialize the losses.

The first step in subjecting the bankers to market discipline is requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It is this disclosure that bankers fear most.

JPMorgan and Jamie Dimon showed this when they tried to hide the London Whale's CDS trades and even cut off the regulators from the information about the positions.  The stated reason for limiting access to the information was fear that the market would find out and trade against them and make the losses on the positions worse.

For anyone not working for JPMorgan, this is known as market discipline and linking consequences to actions.

This is how a former top banker in treasury described his time in a bank that failed: "Risk produces profits, profits lead to a higher share price, and executive pay was linked to that. It was so fucking easy to manipulate the share price; simply take some more risk. 

"I was having a great time – travelled around the world, feted by people. I used to be invited to every major sporting event in the world … Everyone is nice to you because you represent a chance for them to make money. It becomes very tempting to think that actually all these people like you for who you are. I stressed internally the risk we were taking. But you have to understand, nobody likes a prophet of doom." 

This is not a job but a lifestyle, people working in the City say. And why would they risk that lifestyle by taking a harshly critical look at themselves and their colleagues? Why would they go against the grain, isolate themselves and become the messenger of scepticism or even bad news? 

Look at the HBOS brass. The worst punishment that may be in store for them is a ban on ever working in a bank again. No jail time, no financial penalties, not even a clawback of bonuses – even though these were based on profits that have proven illusory. 

What kind of an incentive structure is this? What kind of deterrent? 

Which brings us back to self-delusion. The fundamental problem in finance is not greed – which is really a different word for ambition, measured in monetary terms. The problem is that greed is not checked by fear of its consequences. 

As this HBOS affair makes clear, working in the top layer of finance means life-changing rewards when things go right, and minimal punishment, if any, when they don't.