The discreet charm of other people's money:James Saft

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - If you get paid for hammering, everything looks like a nail.

One of the clearest lessons of the debt market debacle is how poorly constructed and dangerous many compensation arrangements in financial services are.

In short, a lot of people have made a lot of money in recent years taking risks with assets that do not belong to them, taking a hefty share of the profits if bets pay off but not sharing equally in the losses.

What to do about it is, of course, a lot less clear.

"Banks have come to realize in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change," Bank of England Governor Mervyn King said in an appearance before lawmakers last week.

For a good example, look no further than UBS's (UBSN.VX: Quote, Profile, Research, Stock Buzz) recent mea culpa on how it clocked up $37 billion of writedowns. It details how its employees could use UBS's very low cost of borrowing, buy risky assets like subprime and be credited with creating value.

"Incentivization arrangements did not differentiate between return generated by skill in creating additional returns versus returns made from exploiting UBS's comparatively low cost of funding in what were essentially carry trades," the report said.