Amidst all the chaos following the financial crisis, an odd game has broken out among regulators on either side of pond. Who can dream up the most painful compensation plan for bankers?
The leader in the clubhouse was the European Banking Authority, which helped sculpt the EU bonus cap at 100% of fixed salary and then threw a bucket of cold water on banks’ plans to pay out monthly or quarterly allowances to make up for some of the losses. That second move at least made sense. You can’t allow a vehicle to circumvent a rule you just put in place.
Either way, New York Federal Reserve Bank President William Dudley is giving the EBA a run for its money. In a closed-door speech on Monday with Wall Street executives, Dudley said that banks should defer bonuses for a decade. Ten years!
Not only that, he suggested that bankers get bonuses paid in debt securities rather than in equity, allowing any future fines to be scooped off the top of the bonus pool. Imagine having a good year, waiting another nine to cash in, only to find out some bozo on a different continent colluded with some other bozos from different banks and, poof, your bonus – one you’ve been waiting on for a decade – is gone.
Dudley, an ex-Goldman banker, has a different take though, suggesting that the industry is corrosive at its core, rather than recent legal actions being the fault of a select few.
"I reject the narrative that the current state of affairs is simply the result of the actions of isolated rogue traders or a few bad actors within these firms," he said.
I don’t know. Dudley may be right in part. Incentivized comp needs to be attached to provisions that ensure bankers acted ethically to earn that money, and banks and regulators need tools to take back any compensation that was earned through illicit means. But that’s what clawbacks are for.
Maybe Dudley is posturing. Maybe he’s not. They served chicken and salmon for lunch, so the meeting wasn’t all bad.
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Quote of the Day: "How will a firm know if it is making real progress? Not having to plead guilty to felony charges or being assessed large fines is a good start." – New York Federal Reserve Bank President William Dudley