James Pethokoukis

Politics and policy from inside Washington

Should the Fed determine pay at 5,000 banks?

September 18, 2009

Talk about a phenomenally bad idea. According to the WSJ:

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions. … Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.

Me: Team Obama wants the Fed to be the super-regulator of the financial system. Sen. Chris “I have no confidence in the Fed” Dodd, chairman of the Senate Banking Committee, would prefer a new, separate entity. A now here we have a plan that would see the Fed doing the kind of thing a super-regulator might do. It is like the Fed is saying, “Hey, we know we dropped the ball before. We get it.  Now we are getting tough. Trust us.”  And don’t ignore the fact that the guy pushing this is Daniel Tarullo, a Fed governor and Obama economic adviser. This is like a joint Fed-WH operation. Also don’t forget that this is coming right before the G-20 meeting where there are expected to be calls to get tough on banker pay. So one could view this as a PR ploy by a WH that is less enthused about pay restrictions than Europe.

Of course, this is a lousy idea. Banker pay didn’t cause the financial crisis. The government should not be micromanaging private-sector compensation. Also, the more the Fed is involved in the regulatory process, the more it is open to political scrutiny.  Yves Smith seems to think this will tamp down support for Ron Paul’s Fed audit bill. Actually, I think this increases support for the bill since the more powerful the Fed seems, the greater the attractiveness of increased oversight and congressional meddling.

Comments

Yes, absolutely. Shareholders will increasingly loose confidence when a large notable part of the profits go to management in the billions. Accountability for ‘talĂ©nt retention’ should be in the results of stable economic growth where practices do not endanger the global or nationals economies.

… if each top professional wants top bonuses, these should be fairly tied to results, not simple short-term gains or potential gains. And those rewards should not terribly overshadow shareholder benefit by more than 1% of total tanglible profits.

Posted by David Z | Report as abusive
 

This is probably wrong way to go about handling the problems (Wastes lot of time and leaves doors open for corruption). The simplest solution is 90% taxes on any bonuses in excess of 1 million (or X Million). Why do we have to make everything complicated hiring people to negotiate the amounts year after year.

Posted by Ritesh | Report as abusive
 

This article failed to mention this is only the banks the fed helped not all banks .

Posted by RFI | Report as abusive
 

Ritesh -
I assume by a 90% tax on bonuses over $1 million, you meant a 90% tax only on the portion over $1 million (ie, the 90% rate would apply to $200,000 of a 1.2 million bonus). Other wise you’re effectively capping pay at $999,999.99. Making a dollar over that would decrease your income by 90%.

 

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