The financial crisis of 2007—08, which led to what is now known as the Great Recession of 2008—09, will go down in history as one of the most troubling economic events of the postwar era. Although some prescient analysts forecast that the housing bubble in the United States, which triggered the crisis, eventually would burst, we suspect that few foresaw the crisis bringing the United States and other global economies nearly to their knees. Certainly, no mainstream forecaster or high-profile policymaker predicted this outcome.

Even now, after the dust has settled somewhat and a halting recovery is under...

Commercial banking in the United States since about 1930 has for the most part been a simple business, with adequate but not particularly attractive returns to shareholders. Then for a golden decade, between the early 1990s and the first half of the 2000s, it outperformed, offering high and stable returns to shareholders and accounting for an increasing share of corporate profits.

At the time, few sought to identify the confluence of factors that led to such a positive environment for banking or to ask whether that environment was sustainable. With a decline that began somewhat slowly in the middle of...

Work is currently going on under the auspices of the Group of Twenty (G-20) to reform the international financial system to prevent a recurrence of the present global financial crisis. The G-20 identifies the root causes of the crisis and voices its concern about financial sector practices as follows: “During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial...

Examinations of the future of hedge funds are daunting tasks, not in the least because understanding hedge funds is still a subject of intense academic, industry practitioner, regulatory, and legislative examination. Even the very definition of a hedge fund defies easy characterization, an unusual irony given that, at least for the foreseeable future, hedge funds stand a substantial chance of remaining fixtures on the global landscape of wealth management.

Perhaps the clearest definition of a hedge fund may be that it is a simple compensation contract and little else, systematically speaking. Other useful definitions may reference the fact that hedge...

Since at least as early as the 1950s, the press, the general public, politicians, and academic researchers have remarked on the high levels of pay in the United States for the chief executive officers of corporations. These observers question whether these pay levels are fair and whether incentive structures are appropriate.¹ As an example of this view, shortly after his election in 1992, President Bill Clinton signed Internal Revenue Code section 162(m), which limits the tax deductibility of an executive’s compensation to $1 million, with an exception for performance-based compensation. This law promised to rein in “excessive” executive compensation. (Ironically,...