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Feds to slash bankers’ pay, spurs debate
The government moved in a sweeping and unprecedented way Thursday to curb the pay of executives at banks and Wall Street firms that contributed to last year’s global economic crisis.
In simultaneous announcements, the Federal Reserve and the Treasury Department prescribed the pay limits to quiet public anger over the regulators’ failure to restrain multimillion-dollar bonuses and other exotic pay schemes on Wall Street. The moves stirred a debate between people who saw the actions as long overdue and others who viewed the intervention as excessive.
Supporters said the effort would go a long way toward ending the incentives for short-term profits and bonuses that helped cause last year’s financial meltdown and left taxpayers footing the bill. Opponents worried that the new regulations go too far, exceed the government’s authority and attempt to dictate what for centuries in the United States have been the private decisions of executives and boards of directors.
The cuts ordered by Treasury pay czar Kenneth Feinberg target three of the largest culprits in the crisis - Citigroup, Bank of America and American International Group - as long as they continue to rely on government bailout funds. But the Fed took on a much broader group in announcing that it would regulate pay at the 28 largest banks as well as thousands of community banks. Its rules potentially will have a more lasting effect in limiting pay throughout the financial sector.
The Fed’s targeting of the largest bank holding companies ensures that unsound pay practices of executives and traders at all the major Wall Street players in the crisis are reviewed, including Goldman Sachs Group Inc., JPMorgan Chase and Co. and Morgan Stanley - companies that have already announced generous bonuses for employees this year after paying off their obligations to the government to free themselves from the Treasury’s restrictions.
Fed Chairman Ben S. Bernanke, who has been nominated for a second term and faces strong criticism from some quarters in Congress, has been under the gun for not using the Fed’s sweeping powers over banks and Wall Street firms to curb risky practices in the past. The Fed and Treasury also were compelled to act to comply with international agreements to curb excessive pay adopted at recent meetings of the Group of 20 economic powers.
After conducting a comprehensive review of major banks and directing changes in their pay practices, the Fed said it intends to use its regular supervisory reviews to track and curb potentially risky practices that could lead either to the collapse of the bank or create instability in the broader financial system. While not detailing how it will curb pay, the Fed is citing its authority to regulate for “safety and soundness” of banks as well as its authority to ensure the stability of the broader financial system.
Smaller, community banks also regulated by the Fed - most of which played no part in the financial crisis - will receive lighter reviews and recommendations from the central bank. The Fed is among the most powerful bank regulators and, under the threat of enforcement action, banks are expected to quickly adopt any changes the Fed deems necessary.
“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Mr. Bernanke said. “The Federal Reserve is working to ensure compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or financial system.”
The Fed’s move came as the Treasury’s Mr. Feinberg announced cash pay cuts of as much as 90 percent for the top 25 executives at the seven corporations that received the most government aid, starting next month. The slashed compensation will serve as the basis for salaries next year, and for as long as the firms benefit from government bailouts, he said.
Cash salaries were limited to $500,000 for more than 90 percent of relevant employees, and average total compensation was down by more than 50 percent from last year under Mr. Feinberg’s plans, which were worked out in negotiations with each company. General Motors, Chrysler and their financial subsidiaries also are subject to the pay restrictions.
President Obama said the bailed-out executives are reaping what they sowed.
“It does offend our values when executives of big financial firms that are struggling pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat.”
Mr. Feinberg said he is “extremely sensitive to the public outrage,” and his goal is to replace cash compensation as much as possible with stock grants that align the interests of executives with the long-term interests of stock holders. The executives would not be allowed to cash in their stock compensation to make a quick killing on quarterly changes in profits and revenues.
Mr. Feinberg said he hopes the drastic changes in compensation he is ordering at top financial firms set an example for other firms on Wall Street. But there is little evidence that is the case. Goldman Sachs, JP Morgan and other big firms paid off their obligations to the government earlier this year precisely so they could continue to offer huge bonuses and awards to their most productive employees.
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