You would think that an executive in charge of billions of dollars of other people’s money would be more responsible. After all, the mistakes they make could have a significantly negative impact, not only on their clients, but on one of the most vital arms of the American economy.

But common sense on Wall Street has never been overly common. And lest we forget, the yearning for the almighty buck almost always trumps logic and reasonability.

I read a very interesting, yet highly disturbing, article in the Financial Times last night. It discusses how the Institute for International Finance (IIF), a group of global bankers, is calling for stricter compensation practices among its banks. Now that the American economy is in danger of a dreadful recession, bankers are starting to wonder if they should have done things a bit differently.

When you are counting the pennies hidden under the cushions of the couch in the corporate lobby, any option to reroute the roads that got you to that financial ruin looks appealing. Unfortunately, the damage has long been done.

After reading the article, I spent some time digging through old headlines. It did not take long before realizing our future was spelled out right there in black and white. Anybody that did not see the current mortgage crisis coming was not reading the headlines.

Learning the hard way

I uncovered headlines talking of a “Wall Street Bonanza” and “Record-Breaking Bonus Payouts.” Just two years ago, companies like Goldman Sachs (GS:NYSE), Morgan Stanley (MS:NYSE) and Lehman Brothers (LEH:NYSE) were bragging of huge annual bonuses. Their executives were putting so many profitable deals on the books, bonuses of $40 million and more were going to CEOs. It was a fantastic time for Wall Street bankers.

Just 24 months later, share price at these same firms is plummeting, approaching 50% losses and the deals those executives were so proud of are no longer looking so juicy. In fact, many of them have imploded leaving the Street vulnerable to major problems. In fact, some of the companies shelling out record bonuses just a year or two ago are now frantically searching for the cash needed to keep them in business.

A few revolutions around the sun and the situation is bleak. Many watchful eyes are blaming the downturn on the greed created by overly zealous incentive packages. Why should a CEO worry about the future when he has the opportunity to bank $40 million right now and forever end his family’s financial burdens? Who cares if his company losses $40 billion in the next two years; he’s rich now.

Few folks have the ethical strength to turn away that kind of opportunity. And those that do will never see a corner office. It takes greed to succeed.

Wish in one hand, regulate in the other

That kind of greed is why the IIF is calling for changes. Unfortunately it wants something it can never have. Regulations are the kryptonite that destroy economies and eradicate investment potential. If all Wall Street banks were forced to follow the same payroll and incentive plans, competition would be eliminated and the drive to succeed would be squashed like a turtle in rush-hour traffic.

What we need to do is learn from our mistakes. The companies with executives smart enough to successfully manage billions of dollars without risking the future on speculative deals are the ones that will survive. We are already seeing that point play out. The banks that did not go for the all-or-nothing portfolios are now on top, controlling the fate of Wall Street. These few companies are the folks with cash, propping up any chances of a major recovery.

We are in a wait-and-see mode. But one thing is for sure, more Wall Street regulations are not an option. All they will do is eliminate a free-moving market and reduce future potential. On Wall Street, only the strong will survive. Mistakes will be made. Some firms will grow stronger. Others will shrivel and die.

Create your own crystal ball

Your job as an investor is to educate yourself and be able to read the headlines for what they are worth. By studying what has happened, you will be able to pick out the strongest competitors and use their strength to carry you through the hard times.

Keep an eye on the industries so-called fallen angels. There are a lot of firms remaining with strong balance sheets, heading down a path towards future profits. Their share prices have been hurt by their competitor’s mistakes, not their own. Eventually their strength will show.

One of those companies is Ambac Financial (ABK:NYSE) and another is a French rival, AXA (AXA:NYSE). Ambac is making lots of headlines, but its past fortitude in the credit market is beginning to show. And AXA has little to do with the American mortgage crisis, yet its share price has been slapped.

For long-term protection and profit potential, do some research and invest in the companies with real potential, not just short-term hype and speculation.