- The Washington Times - Saturday, September 19, 2009

The Federal Reserve for the first time would police banks’ pay policies to make sure they don’t encourage excessive risk taking, under a plan the Fed is drafting.

The proposal is the Fed’s latest response to criticism that it failed to crack down on lax lending, reckless gambles and other practices that led to the financial crisis.

The central bank’s more activist stance carries a risk, though: It could intensify accusations from lawmakers and other critics that the Fed is overstepping its bounds and should be reined in.

Under its proposal, the Fed would review - and could reject - pay policies that could cause too much risk taking by executives or others, according to two people familiar with the plan. The Fed would not actually set compensation, however, those people said.

They spoke on the condition of anonymity because the proposal has not been finalized.

Yet the proposal is far-reaching. The Fed would review salaries, bonuses and other compensation for CEOs and other senior management, the people with knowledge of the proposal said.

It also would cover certain employees, such as traders, who can take big risks on behalf of a firm, they said. And it would cover some workers whose compensation could affect their risk taking, such as loan officers making mortgages, they added.

Chairman Ben S. Bernanke’s Fed could examine not only the compensation level but also how it’s structured, such as when it is awarded, the sources said.

The goal is to make sure banks’ pay policies don’t encourage top managers or other employees to take gambles that could endanger a company, the broader financial system or the economy. The failure of many banks to closely monitor risk and limit compensation that might encourage too much risk contributed to the financial crisis.

The proposal, in the works since early this year, could be unveiled within weeks, people familiar with the initiative said. The public, the industry and others would be able to comment on the proposal, which could be revised. A final plan, subject to approval by the Fed’s Board of Governors, could be adopted by year’s end.

Some details of the Fed plan were reported earlier Friday by the Wall Street Journal.

The proposal would cover all banks - nearly 6,000 of them - regulated by the Fed. It wouldn’t cover savings and loans or other institutions overseen by the Federal Deposit Insurance Corp. or other regulators.

Because compensation plans can be structured in numerous ways, the Fed is avoiding a one-size-fits-all approach. The biggest banks - about 25 of them - would develop their own plans to make sure compensation doesn’t spur undue risk taking. If the Fed approves, the plan would be adopted and bank supervisors would monitor compliance, people familiar with the proposal said.

At smaller banks, where compensation is typically less, the Fed would provide guidance about what steps it thinks could rein in excessive risk taking.

The Fed’s proposal is running on a track separate from the Obama administration’s efforts to curb executive pay. The administration’s pay czar, Kenneth Feinberg, has been consulting with seven companies that received “exceptional” assistance from the taxpayer-funded $700 billion bailout pot.

Those companies - American International Group Inc., Bank of America Corp., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial - last month had to propose compensation packages for their highest-paid employees. Mr. Feinberg has veto power over them.

Once those companies exit the government’s bailout program, they would avoid Treasury oversight of their compensation. By contrast, oversight under the Fed’s proposal would be lasting.

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