James Pethokoukis

Politics and policy from inside Washington

More reasons to mock the Fed’s plan to regulate Wall Street pay

September 18, 2009

My Reuters amigo Christopher “Black” Swann goes after the Fed plan to curb Wall Street pay — with a vengeance. Here is a bit, but read the whole thing. Your brain will thank you:

1. The Fed is certain to be outmatched. In one corner you have a central bank that has been notoriously spineless on regulatory matters. The institution is crammed with officials who have traditionally seen themselves as defenders of the banking system and advocates of laissez faire. … In the opposing corner you have heavy-weight Wall Street institutions with armies of lawyers dedicated to gaming the regulatory system.

2. There is a deeper objection to the Fed’s effort. The real problem is not the structure of bank pay but its scale. The received wisdom remains that longer-term incentives will curb risk taking. Lock up bonuses in stock and you will tame bankers. The experience of the 2008 financial crisis screams otherwise. In the case of Lehman Brothers and Bear Stearns, leading bankers were major shareholders. Richard Fuld was heavily invested in Lehman stock and saw the bulk of his fortune evaporate when the firm collapsed. Ownership does not seem to lower risk.

3. The key, then, is to curb the overall amount of risk that banks can take on. The main tool for doing this is by insisting on much larger capital reserves. This kills two birds with one stone. Tighter capital rules will increase the stability of the financial system and limit the exposure of taxpayers in the event of failure. In addition, tighter capital rules are the most reliable way of bringing down overall bank pay.

Comments

Let’s all say this together – “socialism”. Very good boys and girls, now practice it every day until you get it down pat.

Posted by Frank | Report as abusive
 

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