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Didn’t they really have skin in the game?

Joshua, in the comments to this post, asks the excellent question:

My understanding is that the Wall Street guys had large fortunes in the stock of their companies. If Richard Fuld of Lehman lost a billion dollars, how much more skin in the game would he have needed to have the right incentives? Why would it be that in general the firms with CEOs that had more stock and more exposure did worse than the ones with less?

Jimmy Cayne, CEO of Bear Stearns until the last months of the firm, also lost a billion dollars.

I once thought as Joshua did. Isn’t this loss a pretty big deterrent to excessive risk-taking? Not really, it turns out. These were paper losses that could not have been easily realized and captured. Fuld was able to cash out hundreds of millions of dollars from his stock holdings. Cayne confesses to be worth a mere $600 million after his billion dollar loss. Not exactly a wipe out. I will have more on this in my upcoming essay.