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FSA barks up wrong tree on guarantees

July 21, 2009

The Financial Services Authority has since the credit crunch had a bee in its bonnet about the incentives and rewards offered by financial firms and whether these encourage risky behaviour. It’s a perfectly reasonable concern. Big bonuses probably did skew behaviour towards excessive risk taking in some cases, although the crazy risks run by employee-shareholders at Bear Stearns and Lehman Brothers suggest it might be a more complex picture.

But the FSA’s latest campaign — against long-term bonus guarantees — simply doesn’t make sense. The regulator has written to more than 40 chief executives in the financial services industry warning them against offering bonus guarantees with a duration of more than one year. This is “inconsistent with effective risk management”, the letter states.
 
The whole idea of guarantees is of course a loaded one in the wake of the crisis. Some feel that bankers have come through it in better shape than their shareholders.

But one has to question whether the FSA is wise to stray into this area at all. Bonus guarantees are largely used to lure employees with special knowledge or skills to move their “practice” from one firm to another. The extent to which banks should invest in building up in a new area in this way is surely a commercial matter for them and their investors. It should only be a matter for the regulator if the level of investment is so big that it might imperil the whole business.

It is also very questionable whether guarantees do encourage risky behaviour. Arguably they do precisely the opposite. After all, employees who must earn their bonuses have an incentive to take risks. Their pay will be meagre if they do not. But a long-term guarantee, for all its shortcomings, actually encourages risk aversion. If employees have been promised the full rewards up front, their objective is to avoid being fired — not to shoot the lights out.

Again, the regulator should only involve itself if and when guarantees — as a proportion of a firm’s total compensation bill — reach such a scale that they make its cost base less flexible, thereby limiting its ability to adjust to changes in markets.

This is not an argument in favour of bonus guarantees. But they are a commercial tool that should be available to employees of a people business. The FSA should keep its powder dry for more important battles, especially ones where it can actually enforce its own decision (which is doubtful in this case). That said, with the opposition Conservative party threatening to give it the chop anyway, it may not have many more to fight.

Comments

To: MEMBERS OF THE SENATE

URGENT: TAKE THE FEDERAL RESERVE SYSTEM OUT OF FEDERAL BANK SUPERVISION

I first emailed this plea to various members of the House and Senate Banking Committees in April 2008. I emailed the same plea on or about March 14, 2010, and followed up with a phone call to each committee member’s office expressing the same plea on March 15, 2010. AND WHAT DID I SEE RELEASED BY SENATOR DODD? A BILL THAT KEEPS THE FEDERAL RESERVE SYSTEM IN BANK SUPERVISION.

I worked as a bank examiner for the Fed for over 30 years. After serving in numerous capacities, I can credibly tell you that the Federal Reserve System should NOT be involved in bank regulation and, at the same time, engaged in setting monetary policy. This is an inherent conflict of interest and is the reason we are in the banking crises that we are in today. MONETARY POLICY AND BANK SUPERVISION CANNOT BE DONE TOGETHER BY THE SAME AGENCY. LET ME REPEAT. IT’S A BLATANT CONFLICT OF INTEREST!

The previous Fed chairman continually lowered interest rates, promoted the housing boom by encouraging the use of exotic mortgage products, and refused to write regulations to address issues related to the inherent risks associated with exotic mortgage products. As a result, no bank examiner, Federal or State, in his or her right mind could or would dare do anything substantive to hinder the subprime mortgage explosion that ensued. THIS IS THE WAY IT REALLY WORKS IN REAL LIFE, REALLY! YOU GUYS DON’T GET IT. YOU SET UP THERE AND LISTEN TO THE FED CHAIRMAN AND FED GOVERNORS BLOW SMOKE UP YOUR COLLECTIVE DRESSES AND BUY IT. THIS TIRED OLD LIE THAT THE FED NEEDS TO BE IN BANK SUPERVISON TO SET MONTETARY POLICY. EITHER YOU DON’T GET IT, YOU DON’T WANT TO GET IT, OR YOU’RE TOO LAZY TO TRY TO GET IT. OR YOU WANT TO KEEP THE GOOD OLE BOYS AT THE FED WITH ALL THE POWER CONCENTRATED IN THE FED SYSTEM.

THE DODD BILL GIVES THE FED SUPERVISION OVER BANK HOLDING COMPANIESS WITH $50 BILLION AND MORE IN ASSETS. I worked as an examiner and I can tell you for a fact that the Fed has had supervision responsibility over bank holding companies of every size for over 30 years and THEY WERE ASLEEP AT THE SWITCH! Now you want to give them supervision over something they’ve always had supervision over? Are you nuts? You just don’t care about the facts? Don’t care about how things really are?

The Fed chairman stated, as every past chairman has, in testimony before a house subcommittee on March 17 that the Fed needs supervisory oversight over small state member banks too in order to establish smart monetary policy. BULL CRAP! The Fed chairman, the governors or their staff do not use data from bank exams or examiners for anything. They use date provided by economists on a macro level. Economists think bank examiners are beneath them and would never ask examiners for data in order to establish economic policy. IT DOESN’T HAPPEN IN REAL LIFE? BUT YOU GUYS KEEP BUYING THAT TIRED LIE YEAR AFTER YEAR AFTER YEAR. If that were true, the Fed Chairman and former Secretary Paulson wouldn’t have run over to a closed session of congress in the middle of the night in early 2008 with the sudden realization that the our country and the rest of the industrialized countries of the world were on the brink of a great depression. In fact, both of those clowns kept telling the public that everything was fine, the fundamentals of the economy were strong and that the problems we were having had reached a bottom. THAT’S HOW IT REALLY IS. THAT’S REALITY. DO YOU NOT GET IT?

DO YOU NOT ALSO SEE THE CONFLICT OF INTEREST THAT THE FED FACES DUE TO TRYING TO SUPERVISE BANKS AND SET MONETARY POLICY? I DON’T CARE WHAT OTHER COUNTRY OR COUNTRIES ALLOW THEIR CENTRAL BANK TO DO BOTH, IT’S A CONFLICE TO INTEREST! DO YOU NOT GET IT?

CORRECT THIS CONFLIT NOW. There needs to be one single Federal Bank Regulator.

DO THE RIGHT THING!

Posted by mikeexaminer | Report as abusive
 

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