Lots of good stuff in the WSJ today on banker compensation.
1. News report:
The Federal Deposit Insurance Corp.'s board narrowly agreed to start the process to impose higher fees on U.S. banks whose compensation plans encourage risky behavior that could threaten the bank's solvency. The 3-2 vote to seek public comment on the proposal exposed a divide between federal officials over how best to police pay. ...
The proposal suggests a compensation model that would favor banks that pay employees in high-risk business lines a significant portion of their compensation in restricted, nondiscounted company stock that vests over a number of years and can be withdrawn under certain circumstances. The system would also favor pay structures administered by independent members of boards of directors.
FDIC Chairman Sheila Bair said the agency has no interest in setting specific limits on the amount bank employees can make. Instead, the proposal raises the question of whether to use deposit insurance fees as an incentive to encourage compensation practices that favor less-risky behavior.
One immediate concern is posed by the alphabet soup of federal banking regulators; namely, that the Fed and FDIC will end up each imposing potentially inconsistent compensation regulations on the banks they supervise:
Comptroller of the Currency John Dugan, an FDIC board member, said he had "substantial concerns" about the proposal, in part because the Fed and Congress are moving forward with separate plans. "It would be very unfortunate to have an end result where insured institutions...were subject to inconsistent schemes evaluating the risk of their executive compensation programs," Mr. Dugan said.
2. Holman Jenkins sarcastically opines that Bashing Bankers Is a Political Duty:
Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition. A firm's management, with its own interests strongly in mind, ultimately decides how much of a firm's revenue to spend pleasing the highly mobile employees who do the work of pleasing the firm's highly mobile clients and investors.
But didn't taxpayers bail out the financial system, so don't taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren't doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax ....
None of this means Americans don't have an ancient and abiding interest in subjecting bankers to scorn. A rough socialism is fundamental to civilization: The most beautiful virgin must be sacrificed to make the other virgins feel better—a service politicians are especially keen to provide when the alternative might be looking at their own role in the reckless risk-taking of banks and homebuyers.
Heh.
3. Yale law prof Jonathan Macey opines that:
Bonuses are predicted to run into the billions of dollars, and many of the banks that got the most bailout money are paying the biggest bonuses. The two issues are intimately related—and as long as the administration continues down its too-big-to-fail regulatory path, Mr. Obama will stay in the business of paying huge bonuses to fat cat bankers.
He proceeds to explain why at length. It's a must read. In sum, however, let me agree completely with his conclusion that:
There is only one way to resolve the bonus problem. We should continue to let shareholders pay their managers whatever and however they want. But we must get out of the business of guaranteeing against failure. The bankers and the shareholders who enjoy the rewards of risk-taking should be made to act like real capitalists: They should be required to assume the risks that go along with the banks' business activities.
Banks that are considered too big to fail should be dismantled into smaller pieces that the economy can digest. And the government should make it clear that it will allow these institutions to fail. When this happens, the shareholder-owners of these banks will pay their managers much more sensibly—and Mr. Obama will be able to wash his hands of the business of helping out the fat cat bankers on Wall Street.
