"Hedge fund managers are making money on a scale that once seemed unimaginable. One manager, John Paulson, reaped $3.7 billion in 2007." ; NYT, April 16, 2008
A fable
When diggers in a diamond mine in Neverland found a big diamond they got 20% of the proceeds. This motivated them to glue smaller diamonds together (like bundling mortgages). One day the composite' diamonds became unglued and people lost trust in diamonds. The owners of the mine solved the problem by buying the bad diamonds. They passed on the cost to the shareholders, saying "We need to save our business". The shareholders saw the logic; the show must go on.
Two possible endings
A. Diamonds are restored in value; shareholders lose a bit but they are mostly relieved. Diamond diggers continue to earn 100 times as much as the average Joe.
B. Diamonds lose value. People who put money for retirement in diamonds lose their life-savings. The diamond diggers lose as well but they can resume their spiel as soon as the economy starts up again.
Moral
Like diamond miners, money managers need to be controlled. Market forces are not effective in controlling their them. The moral hazard is too big. They should get a regular salary, not a bonus based on the amount of money they generate. A teacher salary seems reasonable. Handling kids is at least as important and demanding as handling money.