Out of Control Policy Blog

Fed May Bypass Congress On Wall Street Pay Limits

Back at the beginning of August, the House passes a bill that would put some limitations on executive pay, requiring nonbinding votes to approve compensation and severance packages for top level executives. The bill also would allow for regulators to review and reject compensation packages at firms worth over $1 billion if the pay was considered a threat to systemic stability.

With the excessively parental bill before the Senate, and a battle looming on the appropriateness of legislating tighter rules on what someone can be paid (National Recovery Board anyone?), it appears the Federal Reserve is ready to just bypass that whole system. For get publicly elected democratic process. The Wall Street Journal had the story this morning:

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.

A final proposal is still a few weeks from completion and could be revised along the way, according to people familiar with the matter. It requires a vote by the central bank's board, but no congressional approval.

The U.S.'s largest banks, about 25 in number, would get especially close scrutiny. The central bank intends to compare these banks as a group to see if any practices stand out as unusually dangerous to their firms. [...]

The proposal will likely push banks to use "clawbacks" -- provisions to reclaim the pay of staffers who take risks that hurt their firms -- in certain pay packages, among other tools, to punish employees for taking excessive risks with their firms' money. The central bank could also demand that more pay be offered through restricted stock or other forms of long-term compensation designed not to reward short-term performance. [...]

"Given the changes the industry has already done, if the restrictions on income-producers or salespeople are too draconian, it will actually undermine the strength of the institution," said Scott Talbott of the Financial Services Roundtable, a trade group of financial companies. [...]

The Fed board will consider the proposal in the coming weeks. If approved, it will be proposed for public comment. Officials expect to move forward with the plan quickly, said people familiar with their planning.

A big difference between this proposal and the House passed bill is that this applies to more than just CEOs. This rule would be more like the bill proposed to Congress in April that, if passed, would have granted Treasury oversight over all pay plans at banks, from CEOs to janitors.

The timing of this move by the Fed is also very political:

The Fed's likely move is a response to a growing critique of pay practices that began building even before the onset of the financial crisis. Previously, regulators generally viewed pay as a matter for firms to determine themselves as they tried to attract top banking talent. Fed officials have since shifted their view. Pay is now seen as a factor that could make a firm, and more broadly the financial system as a whole, vulnerable to collapse.

It is a bad idea in the first place to be restricting what and how Wall Street can or can not. It is an even worse idea to just push it through without Congressional approval.

Anthony Randazzo is Director of Economic Research


« What Do Economists Think About… | Main | Time to Strengthen Washington's Troubled… »




Out of Control Policy Archives