--Obama Administration official, 5/12/09
There it was this morning on the front page of the Wall Street Journal. Above the fold. "U.S. Eyes Bank Pay Overhaul". Just when it seemed that focus on compensation limits had begun to abate, news comes that the Obama administration has begun serious talks about how it can change compensation practices across the financial services industry. Yes, you read that correctly. Not just at TARP recipients, but also at institutions that received no federal bailout money. This is new ground for regulators, although they do currently have the (rarely exercised) power to sanction a bank for excessive comp structures. President Obama and Geithner have been critical of the quarter-by-quarter mentality that pervades the financial services business, and Bernanke said the Fed was working on rules that would more closely align compensation with longer term goals. Recently, FDIC Chairman Bair said regulators needed to examine comp pratices in the mortgage industry. One former regulator thinks it is a bad idea to regulate banker pay. Former SEC chairman Arthur Levitt thinks it is a slippery slope to try and regulate banker pay, saying "it has never worked and it cannot work." So what is the right answer? How do you achieve the goal of aligning compensation with risk management and long term value creation?
Links to recent news:
- Hedge funds get behind registration plan. MFA President Richard Baker told a congressional hearing that the organization supports a regime that would subject the vast majority of investment advisers, including the largest and those considered most systemically relevant, to the SEC's registration requirements.
- The SEC's Elisse Walter said that Financial Advisors should be regulated under a unified umbrella, which would help harmonize regulation. Should RIA's have their own SRO?
- Stephen Morse, managing director and head of compliance, operational risk and information risk at Barclays Capital has been named Compliance Reporter's Compliance Leader of the Year.
- Banks are bracing for a credit card write-off storm.
- What is the future of US financial regulation? Rob Cox at BreakingViews has some thoughts on that question.
Posts
1 comment:
I think this is an interesting issue that has to be framed correctly. I was watching a scream fest on CNBC last night where Kudlow and few others were making some very sensationalistic accusations. Here is my take on it:
This shouldn't be so much about "compensation caps" as it about alligning compensation with risk, especially systemic risk.
Taleb (author of the Black Swan)has alot to say about the problem of the "defered blow up" strategy where traders can take outsized risks that have "low frequency, super high impact". An employee can take these outsized bets and make reap huge gains for several years until a blowup occurs that is so big it can bring the entire firm down or even the entire system down. In such an event, the employee is effectively getting a free Put option, as his upside is unlimited, but his down side is only limited to his job and perhaps his current year bonus.
There is no mechanism to guard against systemic risk. One could argue that this is a shareholder issue, and in part it is, but there might be a case that shareholders need more tools at their disposal. However, even shareholders are not going to be guardians of systemic risk, as their obligations are to protecting common equity, not systemic risk.
For instanace, shareholders themselves might be tempted to allowing risk that are "very low frequency, very very high negative impact" where these negative impacts are several time the value of common equity. In such an instance, they too are being given a "free put option"
Post a Comment