Is it Time to Police Pay at Wall Street Banks?



Updated March 4, 2015 –


As a longtime free-market advocate, I never thought I would be writing this – but the time has come to regulate the Wall Street compensation of senior banking executives.

The Federal Reserve has been trying to discourage excessive risk-taking by many banks, including their permissive lending by regulating bank executives’ pay. More than 5,000 banks would be covered.

Such practices helped lead to the deepest financial crisis in decades. The behavior was so bad — in addition to the billions in Obama Administration bailouts — it also helped exacerbate problems with the agency that insures consumer accounts to $250,000.

ID-10076594 ZuzzuilloFederal Deposit Insurance Corp. was forced to consider borrowing money from the U.S. Treasury. FDIC’s bank insurance fund paid out $70 billion through 2013 after 123 banks collapsed by Thanksgiving in 2009.

Since then, big bank profits skyrocketed and bank employees are still getting massive pay and bonuses.

The 2013 profits were up an aggregate 21 percent — $74.1 billion for Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Uninsured business accounts

Businesses have suffered because their accounts are not insured.

“Wall Street greed and irresponsibility have nearly destroyed the U.S. economy,” said Dr. Peter Morici, Ph.D., a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. “Big bonuses for bankers encourage reckless risk taking and were a principal cause of the credit crisis and Great Recession.”

Here are some examples:

“Banks wrote mortgages and sold those to Wall Street financial institutions, who bundled loans into bonds and sold those to investors, such as insurance companies and foreign governments,” said Dr. Morici. “From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays.”

SWAPS

He bluntly criticized the behavior on SWAPS, a financial instrument called a derivative. Simply put, it pays face value to the buyer if a company does not meet its debt obligations.

“Wall Street bankers wrote bogus insurance policies called SWAPS that were supposed to limit losses for investors when mortgages defaulted,” added Dr. Morici. “AIG wrote many SWAPS without capital to back them up, and banks even wrote SWAPS on each other’s mortgages – like two homeowners on a North Carolina beach promising to pay one another in the event of a hurricane.”

SWAPs and bad bonds victimized investors and the bankers garnered mega paychecks. But when the homeowners failed to pay mortgages, banks faltered and the huge losses rippled throughout the economy. But only the banks were bailed out by the government (taxpayers).

To add insult to injury, banks have been allowed to borrow at extremely low interest rates. But they failed to make funds available to consumers and business, and once again enjoy enormous profits. And they have been paying huge paychecks to management.

“Consequently, widows relying on Certificates of Deposit for income, now receive much reduced interest rates” wrote Dr. Morici. “That’s right – Ben Bernanke is taxing grandma to bail out Goldman Sachs.”

Five years later, grandma is still getting negligible interest on her CD.

Credit Cards

Receiving comparatively little attention has been the continuing predatory behavior on credit card customers – banks and credit card companies are still geting away with bogus reasons for jacking up credit card rates and fees.

But a year after the collapse of Lehman Brothers, another SWAPS practitioner, SWAPS lost their stigma, according to published reports.

Dr. Morici agrees:

“Flush with profits, the banks are up to their old tricks – again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses, and manufacturing conditions for another crisis,” said the business professor. “If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior.”

But he points out the Fed would be over-matched in its proposal to regulate bankers’ pay.

“The latter is too complex to be realistic – the banks would run circles around such rules, much like lawyers creating tax shelters,” he said. “Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries.”

Agreed.  In addition, I would add two caveats:

  1. Strictly reduce the amount of risk that banks undertake.
  2. Require high reserves – much higher.

And on a related topic while we are cleaning up Wall Street practices, let us correct the predatory behavior of banks and credit card companies that dramatically increase rates and fees for bogus reasons. The companies are domiciled in a handful of states that permit such behavior.

In other words, here is what is really needed: Police the behavior of these people.

But are the Obama Administration, Congress, certain state lawmakers, and regulators conscientious and determined enough to do the right thing and stop the madness?

From the Coach’s Corner, here’s a related article:

Legal War on Wall Street Chicanery Isn’t Finished — Updated Sept. 9, 2014 Wall Street continues to prove again and again that it needs a moral compass. True, JP Morgan Chase was fined $20 billion in fines in 2013 and Bank of America was fined more than $16 billion for their companies’ behavior in Wall Street’s collapse in the Great Recession.

“The point is ladies and gentlemen that greed, for lack of a better word, is good.”

-Gordon Gekko, a character in the movie, “Wall Street”

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

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Seattle business consultant Terry Corbell provides high-performance management services and strategies.