Terrific column by Simon Caulkin.

The origins of today’s financial crisis lie not in the mysteries of the global financial architecture but in the pay-for-performance practices of Wall Street and the City. Basically, these practices push the perverse incentives contained in all such schemes to the extreme. What marks out the financial sector is its offer of unlimited upside for inventors of clever wheezes like collateralised debt obligations (don’t ask) or mortgage-backed securities, with no downside. Not only are the fabulous bonuses paid before the toxic effects on the rest of the body are evident (and sometimes brazenly even when they are: see Stan O’Neal’s $161m and Chuck Prince’s $42m exit packages at Merrill Lynch and Citigroup respectively) – even worse, participants in the system are cynically aware that, as with Northern Rock, they can’t be allowed to go to the wall for fear of bringing down the whole structure.