> The obvious answer to these questions is that human beings always do
> what they are rewarded to do and always have, especially on Wall
> Street. Rewarding prudent risk-taking on Wall Street while punishing
> recklessness would result in a new ethic on Wall Street, one not solely
> driven by generating as much revenue as possible in a given fiscal year
> with no regard to the long term.
This answer is obviously mistaken if it's meant to attribute "rationality" to all decision making on Wall Street.
In fact, so irrational was the calculation and pricing of risk associated with CDOs and CDSs that even some of those seriously afflicted with the "quant" psychopathology involved were able to see the opportunities for profit this created.
Thus Michael Lewis's new book, The Big Short, documents the case of Michael Burry, an individual with Asperger's syndrome who was able, in spite of this, to see that the risk of correlated default on the mortgage loans given on absurd terms for the purchase of bubble priced housing (e.g. "In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.") was fantastically miscalculated and hence underpriced by the CDSs that made possible "the big short." (See <http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004> and Lewis's earlier piece in Portfolio.com <http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/index1.html>).
Ted