The Obama administration’s “compensation czar,” Kenneth Feinberg, last week announced plans to cut the pay of top executives at the seven companies receiving federal support through the Troubled Assets Relief Program. In outlining the change, Feinberg has had to grapple with several misconceptions about Wall Street bonuses — myths that have circulated since the beginning of the crisis.

1. The Wall Street bonus culture led to the financial crisis:

There is absolutely no evidence to support this. The crisis was caused by a combination of lax monetary policy, loose regulation across the entire financial sector, yield-chasing by institutional investors craving decent returns in a weak market and a vast global banking industry that turbocharged the whole process. The bonus system, which has always been part of the securities industry’s DNA, may have encouraged risk-taking by major banks, but it also encouraged risk management and other disciplined forms of corporate governance that are supposed to accompany the incentives.

2. Wall Street is totally indifferent to Main Street.

Wall Street is a sophisticated marketplace in which firms compete aggressively to secure trade orders and assignments from large corporations and financial institutions. The intense competition for virtually every trade lowers the cost of capital and widens access to financial markets for companies, institutions and governments all over the world. Collectively speaking, Main Street is Wall Street’s client and generally has been very well taken care of. In this crisis, Wall Street professionals, through carelessness or errors, lost a lot more money than Main Street did, and probably more, proportionately, lost their jobs too. Wall Street didn’t benefit from the market declines, and only in the past few months has it recovered some of what it lost.

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