It is happening again...

The incentive effects of the "2 and 20" compensation scheme (2% of assets and 20% of profit) for hedge funds and private equity managers are well known (see Before you Invest in a hedge fund). Managers use other people's money to make bets whose payoffs can be characterized as "heads I win and tails you lose."

Now we learn the Investment Banks pay 50% of their revenue in compensation which causes them to lever up their investments. This turns even safe investments into risky ones. In fact the story is beginning to sound a lot like the subprime debacle.

A few weeks ago the financial world was presented with the imminent failure of a publicly traded entity called Carlyle Capital Corporation. ... it had leveraged itself more than thirty to one. ... the Carlyle portfolio consisted of government agency securitities, ... among the safest around. ... Carlyle's investors lost most of their investment and [we] learned that investment companies with thirty times leverage are not safe.