It has been little noticed, but the federal government is looking to control executives’ pay not only at the firms which accepted the government TARP bailouts, but even at banks which did not:
Federal Reserve Unveils Plan To Police Bank Pay
By Frank James, National Public Radio
Halloween is apparently coming early for the financial-services sector. At least, that’s the way a lot of bank executives are likely to view federal moves to restrain some of their industry’s pay packages.Not only is the Obama Administration cracking down on executive pay at the seven financial firms that received the most federal bailout money, the Federal Reserve said Thursday it planned to review the pay and compensation policies at the thousands of banks it oversees to try and derail the process of bank executives taking excessive risks in order to earn big bonuses.
Under the central bank’s proposal, it would have special reviews of the top 28 too-big-to-fail financial firms, putting their pay and compensation policies under special scrutiny because a major mistake by any of those companies could have severe consequences for the entire system.
The pay policies at the rest of the thousands of banks not considered too-big-to-fail would be assessed as part of the regular bank examination process.
An snippet from the Fed’s press release:
“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Federal Reserve Chairman Ben S. Bernanke said. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”
Federal Reserve Governor Daniel K. Tarullo noted that the proposal on compensation practices is an important part of the Federal Reserve’s ongoing effort to improve financial regulation.
“Today’s proposal is but one part of a broad program by the Federal Reserve to strengthen supervision of banks and bank holding companies in the wake of the financial crisis,” Tarullo said. “In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system.”
Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve’s guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.
This story came out at about the same time as the much bigger news, that the Administration was enforcing big pay cuts on the top executives of the seven major firms which were bailed out under the Troubled Asset Relief program. As much as I don’t like the idea that the government can tell companies what they must and must not pay, It’s difficult to criticize such actions concerning the firms which accepted federal relief; they took the money, and in taking the money, they accepted stringent federal controls. Too bad, so sad, must suck to be them!
But I do have a problem with the idea that the federal government can regulate the pay of the companies which did not need or accept a federal bailout. Their pay policies ought to be none of the government’s business.
Now, I first noticed this story yesterday, and was annoyed then, but yesterday was a busy day. When I started to research the story today, I found surprisingly little on it; I guess that much of the media were concentrating on the bigger aspect, the fact that seven bailed out firms were having their executives’ pay slashed.
Then, today, I got this story from Gretchen:
This week Kenneth R. Feinberg, popularly known as the White House Pay CZAR, announced his plan to cut the pay for the top 25 earners at seven companies that received federal government help. On average cut total these executives had their compensation cut by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.
One company was mysteriously missing from the list, General Electric. GE has been regularly protected from the TARP rules. By taking advantage of its ownership of two tiny banks in Utah, GE was able to issue $80 Billion dollars worth of federally backed loans about one out of every four dollars available in the federal loan guarantee program.
A lot more at the link, but the author, blogger Sammy Benoit, concluded with:
The nation’s 7th largest bank¹ gets federal aid with out having to submit to the same checks and balances as its competitors. Its top staff does not have to have their compensation restricted like their competition. Is it because of some loophole in the law, or the fact that GE head Jeff Immelt and their news networks are part of the President’s propaganda team. Either way there are some questions that need to be answered by the “transparent” Administration.
So, General Electric, ranked by Forbes as the world’s largest company, isn’t really a bank, but as Mr Benoit and The Washington Post documented, GE (and some others) sent lobbyists to the FDIC, and got definitions of eligible institutions broadened to include “affiliates” of FDIC-insured institutions, and suddenly GE Capital was eligible — and took the money.
Yet, while the Obama Administration was announcing with some fanfare that the evil executives of the seven bailed out financial; institutions would have their pay cut, and the Federal Reserve told us, with somewhat less attention paid, that the Fed would seek to regulate executive compensation at banks which did not need help, a huge corporation which includes many media holdings — including NBC and the liberally-oriented cble news network, MSNBC — that did take government help is not going to have executive pay capped.
How ’bout that?
¹ – GE may be better known for light bulbs and home appliances, but GE Capital is one of the world’s largest and most diverse financial operations, lending money for commercial real estate, aircraft leasing and credit cards for stores such as Wal-Mart. If GE Capital were classified as a banking company, it would be the nation’s seventh largest.