The Federal Reserve on Thursday proposed a new program of monitoring executive compensation at the nation’s largest financial institutions, a move designed to prevent banks from using pay incentives that encourage risky transactions like those that recently toppled the global economy.
“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed Chairman Ben Bernanke said in a statement announcing the moves. “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.”
A separate explanation provided by the Fed goes even further to justify the proposal, saying, in effect, that Wall Street executives can’t be trusted to limit risk-taking on their own.
Recent events have highlighted that inappropriate compensation practices can contribute to safety and soundness problems at banking organizations and to financial instability. Traditionally, banking organizations and supervisors relied on strong risk management, internal controls and corporate governance to help constrain risk-taking. However, the financial crisis has illustrated that the incentives created by poorly designed and implemented incentive compensation arrangements can be powerful enough to overcome risk controls.
The Fed’s plan is to monitor the pay structures of the nation’s banks in order to discourage excessive risk-taking by executives as well as lower-ranking employees, such as traders. The reviews will apply differently to the nation’s 28 largest institutions versus the smaller community banks, with the larger banks subject to more intensive scrutiny.
Federal Reserve Governor Daniel K. Tarullo said the proposal “is but one part of a broad program … to strengthen supervision of banks and bank holding companies in the wake of the financial crisis.”
It was the second wave of bad news to hit Wall Street in 24 hours. On Wednesday, the Obama administration announced plans to slash pay for the top 25 executives at the seven companies that received “exceptional” funding under the Wall Street bailout bill. The average compensation for those 175 executives will be halved, according to U.S. pay czar, Kenneth Feinberg.
Still, neither the administration’s nor the Fed’s limits would cap compensation at these firms, as proposed by some members of Congress earlier in the year. That means that executives at even those institutions propped up with billions of taxpayer dollars could still be in line for multi-million dollar pay packages. The Fed explains why it didn’t include caps:
[O]ne size does not fit all firms or employees. Best practices for balancing risk and rewards in incentive compensation programs continue to develop and are likely to evolve significantly in the coming years….
Further experience may reveal specific compensation practices that may appropriately be required or prohibited.
Rep. Paul Ryan to deliver SOTU response
Chairman of the House Budget Committee Rep. Paul Ryan (R-Wis.) will deliver the Republican response to the State of the Union Tuesday, according to Mike Allen
Rep. Parker Griffith (R-Ala.)
One of the most conservative Democrats in the House -- a freshman who said he couldn’t support Nancy Pelosi again -- is going to switch over to the GOP. Josh
Rep. Patrick McHenry: Please, Conservatives, Fill Out Your Census Forms!
The conservative congressman from North Carolina, a constant critic of the census -- one of the people who sounded the alarm about politicization when the
Rep. Perlmutter criticizes House measure that would eliminate 800K federal jobs
Congressman Ed Perlmutter today issued a scathing statement criticizing the House of Representatives for passing a spending bill that could put nearly a million federal employees out of work. The Colorado delegation voted strictly on party lines, with all four Republicans voting in favor of the bill and the three Democrats voting in opposition. Perlmutter’s statement: “My number one priority is to get people back to work because that’s the best thing we can do to pay our debt and move forward toward economic stability
Rep. Paulsen touts balanced budget constitutional amendment
In a post for the conservative blog True North , U.S. Rep
Rep. Pete Hoekstra Bashes Global Currency
I was just talking to Rep. Pete Hoekstra (R-Mich.), who’s leaving Congress to run for governor of Michigan, about his proposed Parental Rights Amendment—a
Rep. Perlmutter to hold constituent meet-up in grocery store
Colorado Congressman Ed Perlmutter will hold a Government in the Grocery constituent meet-up this evening from 5-7 at the Safeway at 38th and Wadsworth in Wheat Ridge. The address is 3900 Wadsworth. The meeting, where Perlmutter typically sits at a folding table and talks to whomever shows up, is free and open to the public
Rep. Paulsen, Karl Rove the latest to get ‘glittered’
Rep. Erik Paulsen and former Bush staffer Karl Rove were both showered with glitter at the Midwest Leadership Conference Friday
Rep. Pete Hoekstra Surging in Michigan Gubernatorial Bid
The ranking member of the House Intelligence Committee -- you couldn’t flip on a TV without seeing him in the aftermath of Umar Farouk Abdulmutallab’s botched
School of Hock
A growing number of college grads are defaulting on their student loans as the economy worsens.