Politics & Government

Lawmakers, regulators have banks' bonuses in their sights

Bank of America's headquarters in Charlotte, North Carolina.
Bank of America's headquarters in Charlotte, North Carolina. Davie Hinshaw/Charlotte Observer/MCT

WASHINGTON — With public furor rising over big bonuses for bankers, the White House, Congress and financial regulators all suddenly say they want strong restrictions on executive pay. They're offering bold ideas, probing hearings and a pledge that something finally will get done.

If history is any guide, however, restraining executive pay in the private sector still is going to be a tough sell in Congress, despite some evidence that this time may be different.

Big bank bonuses amid the sharp economic downturn, multibillion-dollar bank bailouts with taxpayers' money and high unemployment are the trigger for these actions, and what happens to bankers may spill over into the broader area of executive pay. Congress is poised to look at giving shareholders greater "say on pay" and other steps to rein in decade-long outsized gains in executive compensation.

President Barack Obama announced Thursday a new temporary fee on the banking sector that could raise as much as $117 billion to offset some costs of the 2008 banking bailout. That's partly in response to the large bonuses that banks are showering on their executives for rolling up huge profits last year.

An analysis by The Wall Street Journal found that 38 top financial companies are poised to pay their employees a record $145 billion for 2009, up 18 percent from 2008, and slightly more than in 2007, before the economy collapsed.

On Wednesday the chairman of the House of Representatives Financial Services Committee, Massachusetts Democratic Rep. Barney Frank, announced a hearing Jan. 22 to examine bank bonuses and other forms of executive compensation.

A day earlier, the Federal Deposit Insurance Corp. said it was studying ways to lower the premiums it received from banks if they took steps to make bonuses and other forms of compensation less of a reward for risky investment practices.

Senators, too, are eager to get involved. Florida Democratic Sen. Bill Nelson wrote Wednesday to President Obama seeking White House support for a Senate bill to make any financial-executive compensation of more than $1 million a year nondeductible from taxes unless it's performance-based compensation. In that case, compensation must be vested over a period of at least five years.

"The legislation will condition an institution's eligibility for tax deductions on ending its reckless compensation arrangements," Nelson wrote to Obama.

If all this sound and fury rings familiar, it should.

Washington lawmakers long have threatened clamps on executive pay, but past efforts have been thwarted by pressure from industry officials, confusion among members of Congress about whether to tackle such problems alone or to go instead for a comprehensive regulatory overhaul, and not least by the fact that political parties and candidates count on Wall Street for campaign funds.

"Things have gotten much more complicated, and the expertise is now with people who have an interest in the status quo," said George Bittlingmayer, a professor of finance at the University of Kansas School of Business.

Many experts think that getting meaningful change will be difficult. The Obama administration, they said, is staffed with top economic advisers who are tied into the status quo and too often beholden to bankers.

"Obama was the finance industry's candidate,' said Steven Schier, an expert on Congress at Carleton College in Minnesota. "That's reflected in the makeup of his economic advisory team. And he wanted credibility with the finance sector."

There's another big political problem: People want simple solutions to complex issues. Members of the House face elections every two years, as do one-third of the senators, and fixing the financial system takes time and often is too complicated to explain quickly to angry voters.

"The real question is why hasn't Congress added the 'too big to fail' problem" to its to-do list, Bittlingmayer said. "These problems are never caused by one single thing."

"There's too much emphasis today on the short fix. People too often are looking to the next election, or the next news cycle," said Raymond Smock, the director of the Byrd Center for Legislative Studies in West Virginia.

Banks are poised to begin paying huge bonuses to their top performers in coming weeks, with some Wall Street firms reportedly paying their employees 2009 bonuses of $400,000 to $600,000.

Bank CEOs defended their compensation practices Wednesday before the special Financial Crisis Inquiry Commission, saying that steps have been taken to restructure bonuses since the financial world nearly collapsed in 2008.

The heads of JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of America all said that their most-senior executives were now paid bonuses mostly in stock options that couldn't be exercised for several years.

Bank of America's new CEO, Brian Moynihan, said his firm had implemented a two-year "claw back" provision that allowed the bank to recoup bonuses if risky bets turned sour. Morgan Stanley said it could recover bonuses for three years.

Those steps, however, are unlikely to calm an outraged public.

Great Britain is planning to tax large bonuses at a rate of 50 percent, and Rep. Dennis Kucinich, D-Ohio, has introduced emergency legislation that would slap a 75 percent tax on the money that banks set aside for bonuses. He argues that the banking system is enjoying windfall profits from the taxpayer bailout and should repay those efforts.

"We're in a footrace to the national Treasury right now. The banks could come down at any time with these bonuses," Kucinich said in an interview, urging colleagues to adopt his bill before the payouts.

Banks know, he said, that "these bonuses have nothing to do with objectives of shoring up the financial system."

Banking interests warn, however, that penalizing bonuses or linking FDIC premiums to compensation practices could have unintended consequences. Banks could pass along the new fees to their customers, for example, or talented bankers could move to new financial firms to escape the penalties, weakening banks anew.

"Do banks pay people too much? Yeah, probably. But ... the issue is how do you map the riskiness of an institution?" said Vincent Reinhart, a former top Federal Reserve economist.

Now a scholar with the American Enterprise Institute, a conservative policy-research center, Reinhart fears that top talent will leave banks for hedge funds, private-equity companies and foreign banks, where they'll be compensated without penalty or any need to declare to a regulator.

"We wind up knowing less about it as opposed to more," he said.

Frank scoffed at that notion, calling such fears "overblown" and adding that uniform restrictions could be passed so that "they'll have to go to Mars" to escape restrictions on compensation.

The president of the U.S. Chamber of Commerce on Tuesday opposed new restrictions on compensation, saying that decision should come from the private sector, not government.

"That's the role of (the board of) directors. People are learning a lot about that," said Thomas Donohue, the chamber's chief, adding that who are those highly compensated in the finance sector are "unique kinds of people" who are also mobile.

Frank wants to give shareholders more say in executive pay, arguing that the boards of directors Donohue refers to often are stacked with pliant cronies of the chief executive.

New compensation restrictions, Frank said, are likely to be restricted to financial institutions.

"The problem of excessive compensation seems to be concentrated there," he said. "I don't see those kinds of salaries being paid elsewhere. Other major corporations didn't cause the problems the financial industry caused."


Brookings primer on Wall Street compensation

Conference Board report on compensation


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