Bank of America's sudden exit from TARP, one of the first U.S. industry-wide bank bailout programs, might not affect this year's bonuses. But it's nonetheless bullish for compensation and hiring prospects for financial market professionals.
For the last few weeks, eFinancialCareers News (in line with other observers) has been predicting demand for financial market professionals will swell after the turn of the year. That already bright outlook just got brighter, in my view. By escaping Treasury Department pay czar Kenneth Feinberg's dictates, BofA - one of the industry's largest employers - will demolish what's been a major barrier to recruiting and retaining talent. At the margin, that's bound to tilt the labor market ballfied in professionals' favor even if the bank neither steps up hiring nor seeks to reverse Feinberg's previous vetoes of top performers' compensation packages.
With less impetus for high-value producers to avoid BofA, the supply of talent available for or actively seeking employment elsewhere may diminish a bit. (While we doubt BofA is on the verge of a hiring binge, we note parenthetically the bank recently hired Priya Misra from Nomura to lead U.S. rates strategy for BofA Merrill Lynch Global Research.)
Now that BofA has broken free, a critical question is whether Treasury will let Citigroup follow suit. Bloomberg News reported Friday that a Citi exit from TARP and Feinberg's oversight faces higher hurdles than BofA did. Citi has some $300 billion in government asset guarantees it doesn't plan to relinquish. More important, its ability to raise new equity from private sources - which it must do as a pre-condition of Treasury allowing it to repay its remaining $20 billion TARP aid - is limited by the government's 7.7 billion share, 34 percent equity holding (which Treasury reportedly is reluctant to sell at this point).
Several large bank holding companies including Wells Fargo, PNC, Regions Financial and SunTrust have yet to repay their TARP aid. But the two institutions with the most on the line are Citi and AIG. After BofA's exit, they are the only remaining "exceptional assistance" bailout recipients subject to Feinberg's pay oversight that regularly compete for Wall Street talent.
Beyond TARP and Feinberg
Of course, even a post-TARP Wall Street faces other formal and informal oversight of compensation practices. Pressed by regulators and shareholders, investment banks continue ramping up the percentage of total compensation that's paid in the form of restricted stock and other deferred assets. Many, perhaps most, top-tier institutions have instituted some form of clawback policy, under which a portion of compensation from prior years can be rescinded if an employee breaks rules or sustains trading losses later on. In October the Federal Reserve released a detailed blueprint to regulate incentive compensation at U.S. banks. Some foreign governments (the UK for one) go further, as would proposed U.S. legislation. Even absent new laws or regulations, bank managements are under pressure to rein in compensation to appease a hostile public and legions of elected officials who pander to it.
It's worth remembering that beneath all of the heat about compensation, there is a ray of light. The traditional cash bonus system pegged to short-term results failed in that it rewarded a great many people for creating instruments and exposures that blew up, ultimately impoverishing not only taxpayers but shareholders and many other professionals who lost jobs despite having no involvement with toxic assets. Ultimately, moves to benchmark compensation to risk along with return will be enacted world-wide. Whether such reforms have a high probability of actually working as intended is another matter.