Too-big-to-fail godfather opposes linking bank fees, risk, compensation
Here’s a new chapter in the ongoing serial novel yclept Regulatory Capture: The battle for bucks.
The FDIC narrowly endorsed a proposal this week that would tie risk-taking, compensation and bank insurance fees. Can you imagine that? Linking risk, compensation and fees? The proposal is ruffling feathers, and none-too-surprisingly the plumage of one senior official central to the institutionalization of too-big-to-fail:
Comptroller of the Currency John Dugan, an FDIC board member, said he had “substantial concerns” about the proposal, in part because the Fed and Congress are moving forward with separate plans.
“It would be very unfortunate to have an end result where insured institutions…were subject to inconsistent schemes evaluating the risk of their executive compensation programs,” Mr. Dugan said. John Bowman, an FDIC director who is also acting director of the Office of Thrift Supervision, asked, “What are the limits of the FDIC’s authority?”
Ms. Bair responded with an unusual public rebuke. “I must say to take a position that we should not even be asking these questions is not one that I can understand,” she said.
Dugan, in theory, fears balkanazation of regulatory authority. Yeah, right. That’s why he opposes any reform that would steal one iota of authority from the OCC –which he claims has done a fabulous job at both protecting consumers and supervising the national banks that failed in 2008. His testimony has vocally opposed expansion of powers of the Fed at the expense of tapping OCC expertise or new authority for the FDIC on those pesky mortgage securities. In Washington, it’s all about turf.
Dugan is an experienced hand at managing turf, whirling through the giant revolving door marked “D.C.” as a Senate staffer, lobbyist and Treasury official. The OCC job has provided primo turf for Dugan, where for the past five years, he became “one of the most powerful engines of economic policy in the world,” according to a terrific profile in The Nation.
The OCC would also turn out to be the perfect perch to put into practice the ideology he had honed nearly 20 years earlier at Treasury when he penned a 750-page “manifesto” entitled Modernizing the Financial System: Recommendations for Safer, More Competitive Banks. (You gotta hand it to those bureaucrats — they could give graduate school courses in irony.) The Green Book, as it was known, didn’t actually propose anything new, The Nation says. But it was critically important: The tome pulled together all the threads of ideas floating in Washington and academic circles that formed the basis for too-big-to-fail.
Throughout the crisis Dugan has actually boasted that his agency did well. His agenda clearly dictates that everyone else around him needs to learn from him. And why not? He is a master survivor and manipulator of facts. The Nation reports:
His favorite talking point is a claim that OCC-regulated banks issued only 10 percent of all subprime mortgages in 2006. But that statement is a distortion, since many of the largest subprime players were regulated by the OCC, according to data from the National Mortgage News, a banking trade publication. Wells Fargo, Citi, Chase and First Franklin–all OCC charges–were among the top ten subprime lenders through the peak years of the housing bubble. In 2006 alone, Wells Fargo extended nearly $28 billion in subprime loans, while Citi issued more than $23 billion. The OCC had authority over more than nine of the twenty-five biggest subprime offenders identified by a Center for Public Integrity investigation.
Dugan is like a banking mole inside financial reform while the FDIC’s Bair is often odd-woman-out in the oversight turf battle. That’s probably because she seems most closely aligned with taxpayer interests — the weakest lobbying special interest sector. The worker bees at the Federal Deposit Insurance Corp. have spent most of their weekends in 2009 shuttering banks and scrambling to repay depositors. Technically speaking, the FDIC fund is kaput and may need its own bailout. Bair’s approach seems reasonable — although the devil is in the details. But let’s face it: Setting compensation limits for any industry is just plain stupid and beyond the purview of government bureaucrats. Safety and soundness issues are and should be under scrutiny and they are indeed FDIC babies. The WSJ reports:
FDIC Chairman Sheila Bair said the agency has no interest in setting specific limits on the amount bank employees can make. Instead, the proposal raises the question of whether to use deposit insurance fees as an incentive to encourage compensation practices that favor less-risky behavior.
“This isn’t about levels. It’s about structures,” Ms. Bair said.
Of course, compensation has been the hot button of the financial fiasco. The issue of compensation came up briefly this morning at the Financial Crisis Inquiry Commission hearings on Capitol Hill. Surprise, surprise. The Wall Street CEOs didn’t say, oh, we paid everyone too much. Not gonna happen. JPMorgan chief Jamie Dimon even dismissed a recent Harvard study that showed that the top guns at Lehman Brothers and Bear Stearns had cashed in a great deal of their stock before their firms hit the skids, effectively severing the role stock grants are supposed to play: aligning the interests of shareholders and the executive suite. “They should check their numbers,” Dimon threw back at the FCIC.
No need to remind everyone. Wall Street is expert at numbers.
If Bair has her way, those executives and people like former Citi advisor Robert Rubin and former Merrill Lynch CEO Stan O’Neal would have been forced to return a goodly portion of their eight- and nine-figure packages or their institutions would have been forced to pay bigger fees into the ailing insurance fund.
Here’s a new proposal: Let’s garnish a portion of the fees failed regulators earn as they swish through the revolving door marked “D.C.”
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