Wake up, Washington: Reform Banker Pay
Two factors caused the 2008 Wall Street crash: sleeping cops and pay-drunk bankers.
Yes, complex financial instruments such as credit default swaps and loan securitizations and the risk created by highly leveraged goliath banks and allowing love-to-win traders to gamble with cheap FDIC-insured deposits all show the “how.” But if Washington regulators had been diligent, they’d have banned certain credit default swaps. Tough cops would have required banks to reduce their debt. Alert supervisors would have prevented the liar loans that created the housing bubble.
On the other side of this “Street” crime, if this massive fraud hadn’t generated massive paychecks, bankers might have stuck to the useful role of knitting savers with users of capital. Hollywood’s adaptation of Michael Lewis’ The Big Short prompts bleak laughter when we observe what happens when otherwise clear-headed adults come in contact with the waterfall of money that cascades through Wall Street.
Congress understood the central role of sleeping cops and pay-drunk bankers when it approved the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law directs Washington regulators to prohibit any type of pay that “encourages inappropriate risks.”
Further, lest the cops continue to doze, Congress set a deadline. This prohibition must be instituted “not later than 9 months” after the statute becomes law, declared Congress. In fact, the nine month deadline set in law comes before the part about the prohibition on “inappropriate” incentives.
Now, let’s check the calendar. This statute became law on July 21, 2010. Nine months later would have been May, 2011. Was the rule finalized by May 2011? No.
How about June or July of 2011, which would be “later than” nine months? No.
How about May of 2012? No.
May 2013? No.
May 2014? No.
May 2015? No.
It is now February 2016.
The answer is still “no.” The regulators have failed so far to promulgate this rule.
Wake up, Washington: Reform banker pay. That’s the gist of Section 956 of the Dodd-Frank Act. It’s far past time to rein in Wall Street paychecks in order to end the culture of greed polluting our economy.
Eight years after bankers crashed the world economy and nearly five years after reforms were to have been implemented, banker pay remains unrestrained. Regulators remain somnolent. JP Morgan raised the pay of CEO Jaime Dimon in 2014 the very year the bank paid record fines to settle claims of “inappropriate” conduct. JP Morgan paid more fines in 2015, and yes, the board awarded him another raise. Trader bonuses tracked by the New York City Comptroller’s office escalate every year.
Regulators point to the problem of interagency coordination as the primary reason for delay. Seven separate regulatory agencies must jointly adopt the new rule required by Dodd-Frank. That’s an unsatisfying excuse since the Volcker Rule prohibition on banker gambling, which is far more complicated, also required multiple agencies to cooperate. They completed the task in what now seems a lightning quick three years (only about two years after the statutory deadline).
Public Citizen has met with representatives of each of the agencies responsible for the banker pay reform rule multiple times every year. (There is an exception: we have not met with the Office of Thrift Supervision. That’s because that agency was abolished. Yes, the rule is so tardy that an entire agency has disappeared in the interim.) Each agency assures us they are working diligently and saying that the rule proposal could come within “months.” Yet the months come and the months go and there is still no proposed rule.
Last year, U.S. Rep. Michael Capuano (D-Mass.) challenged whether officials at the Securities and Exchange Commission (SEC) were responsible for delay. “It’s now 2015. Seven years. Seven years … What’s the hold-up? … Who do I have to kick to get this done? … If it’s my friends at the SEC, first of all, I would not be shocked.”
Could it be that regulators don’t want to reform banker pay? Are regulators intent on spinning through the revolving door to better paying Wall Street jobs wary of effectively fouling the nest with the golden egg that awaits them? Public Citizen has documented the tidal flow between Washington and Wall Street and we sponsor legislation to reform this. In a striking case, a New York Federal Reserve Bank supervisor was caught on tape running interference for a bank. (The tape was made by Carmen Segarra, who was subsequently dismissed because, she says, she was too assertive and reform-minded for the New York Fed culture.) The supervisor exposed by Segarra soon left for a private sector job with financial firm.
Ideally, regulators should consider it insulting that they would stymie pay reform for fear it would affect their future employment. Ideally, they will respond to insult with action.
And, ideally, the regulators will propose a strong rule. Public Citizen believes that a substantial portion of banker pay should be deferred and set aside for safekeeping so as to make sure banker decisions (such as on loans) made in one year prove stable over several years. If they prove reckless, or even fraudulent, the pay would then be nullified. Our proposed rule would also require that if regulators fine a company, the pot of deferred pay would be drained before the bank asks shareholders to pay for the company’s missteps. To facilitate this, bankers should be paid in debt, not stock. Debt-based pay creates an incentive to keep the bank solvent. Stock-based compensation motivates bankers to take excessive risks.
The clock cannot keep spinning. It’s time to wake up, Washington.