[ by Larry Goldfarb]

Risks could be better managed if executives took annual bonuses in very same bonds they sold to customers.

Sallie Krawcheck, who ran wealth-management divisions at Bank of America Corp. (BAC) and Citigroup Inc. (C), suggested that risks could be better managed by making the executives eat what they sell.  In other words, make the executives take their annual bonus in the very same bonds that they sold to customers - to ensure that the executives are true fiduciaries and make the regulators job much more manageable.

Banks, including her former employers, are trading below liquidation value because investors are struggling to determine what returns to expect, Krawcheck said on Thursday at the Bloomberg Markets 50 Summit in New York.  The complexity of the firms and their regulation obscure their value, she said.

“Regulators are fighting complexity with complexity, rule by rule,” said Ms. Krawcheck, 47.  “It is so complicated, it makes you weep blood out of your eyes.”

Giving employees a combination of bonds and equity will moderate risks because midlevel managers with a firmer grasp of risks aren’t unduly encouraged to take bad ones, she said. Top executives, directors and regulators have a hard time evaluating risks from their level, she said.

“If you buy a share of equity, you buy it because you want that management team to take risk and have the stock go up,” Ms. Krawcheck said. Bonds are a “risk-averse instrument, because no matter how much risk they take, you get 100 cents on the dollar if you hold it to maturity.”

Compensation should lean more toward bonds as leverage rises, she said. A return to the separation of retail and investment banks created by the Depression-era Glass-Steagall Act isn’t realistic because even changes in money-market mutual fund regulations have proven difficult, Krawcheck said.

For further details, go to:  [Bloomberg, 9/13/12].