The Head Of The New York Fed Gave Wall Street A Chilling Ultimatum

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william dudley federal reserve

REUTERS/Brendan McDermid

New York Fed president William Dudley addresses the Association for a Better New York in New York on July 29, 2009.

The New York Federal Reserve has had it with Wall Street's behavior, and in a closed-door meeting with industry executives on Monday, it handed down an ultimatum.

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Change your behavior, or we'll have to down size you.

"The inevitable conclusion will be reached that your firms are too big and complex to manage effectively," said New York Fed President William Dudley. "In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively."

The problem, said Dudley, is cultural. The $6 billion trading losses, the violations of international money laundering sanctions, the scandals in which traders shave a little off the top - those are not the actions of a few rogue traders, they are the representation of a corrupted whole.

The problem is that this is a cultural issue and culture is intangible. How do you change it?

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One solution is that you start by changin what matters - compensation. Wall Street has already started doing this by deferring more compensation and tying it to long term performance.

But it hasn't been enough. According to the Wall Street Journal, Dudley went on to say that senior management needs to take more responsibility. He suggested creating some kind of performance bond that would further tie executive compensation to performance or legal issues.

He also suggested creating a database that track any ethical issues lower level employees have had.

Lets see if this has legs.