Big, bad bonus rules could be coming to Wall Street
No matter how bad it got, U.S. bankers always had one piece of knowledge they could fall back on: at least our bonus policies aren’t as onerous as those crazy Europeans. Well, that comforting thought may soon be fleeting.
The Wall Street Journal is reporting that U.S. regulators are digging up old Dodd-Frank plans aimed at curbing risk taking. That likely means longer deferral periods for bonuses and dreaded clawbacks.
The details so far are sparse. But regulators have clearly noticed that U.S. banks have reversed course a bit when it comes to their pay policies. In the immediate aftermath of the crisis, banks were happy to take suggestions from regulators on pay, deferring large chunks of bonus money to better tie compensation to the performance of the firm.
Quietly though, banks have been handing out more cash. Wall Street pay consultant Johnson Associates estimates that just 36% of a $1 million bonus was deferred in 2014, down from 45% in 2010. So expect any new rule to push that figure back up, along with the number of years the shares are deferred.
Then there is the issue of clawbacks, a much more complicated problem. Banks already have policies in place but anecdotal evidence suggests they rarely ever make attempts to recover bonus money, with the exception of when crimes are committed (and still then not always). Likely, new regulations will require banks to at least divulge if and when they are actually clawing back bonuses.
“While many banks now have strong clawback policies on paper, absent disclosure, it’s impossible for investors to know when and how they are being applied,” New York City Comptroller Scott M. Stringer told the Journal.
Still, any aggressive clawback policy will surely create more litigation than it will breed any positive effects. Actions that could result in clawbacks may include “risk-management errors” and “malfeasance,” according to Fed governor Jerome Powell. Good luck defining “malfeasance” in a courtroom without a crime taking place.
Meanwhile, the most interesting part of the report has nothing to do with investment banking. The Journal says that regulators are also considering deferral rules for large hedge funds and private equity firms. That would certainly raise an eyebrow or two.
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Quote of the Day: "There is a time for all things, but I didn't know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily — or sufficient knowledge to make his play an intelligent play." – famed trader Jesse Livermore
