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Jan. 13 2010 - 2:26 pm | 198 views | 2 recommendations | 5 comments

Too-big-to-fail godfather opposes linking bank fees, risk, compensation

WASHINGTON - APRIL 09:  (L-R) Chairman of the ...

Is Sheila Bair thinking about ways to garnish lobbying fees of failed regulators?

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.

via FDIC Moves to Tie Fees to Bank Pay – WSJ.com.

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.”

Image by Getty

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  1. collapse expand

    Nice job of giving us a look at this matter from another angle. You focus on the true issues at hand: the one-hand-washes-the-other system that led us into the crisis and now is benefiting as we (or some of us) emerge. I like the fact that you cut through the bullshit about compensation–it is absurd for the government to be mucking around with banker bonuses when the entire banking system has gone off on a bender of greed and lack of accountability. The feds are gonna pass judgment on the ‘riskiness’ of individual banker’s compensation packages? What does that even mean, in the context of the de facto failures of Fannie Mae and Freddie Mac–created and provided with oversight by the same regulators.

  2. collapse expand

    Maybe the government shouldn’t interfere with compensation but we should protect investors and depositors and taxpayers from ponzi schemes and creation of bubbles and the shameless outright crooks who promote them.

    What’s the fuss about?

    It is about morality and justice and all this bonus fury is a distraction but it is also a banner headline that says:

    Greed Over Country.

    People are asking, “Is there no penalty for bringing an entire country to its knees?”

    The answer leaves a hot coal of resentment in our hearts. In the past bankers and investors leap out of buildings and joined soup lines. Today we rescue them and reward them.

    We used to link laws and morality.

    No more.

    Wall Street doesn’t mind the talk of compensation because it is Unamerican to deprive someone of what they earned. Americans love money and admire a good scheme. Bankers bank on that defense while changing the rules in their favor. All these brillent people, these students of economics all knew what brought about the crash of 1929 and the depression. They took that knowledge to remove the protections from such events to allow them to enrich themselves beyond all imagination.

    It was not expensive. Less than one CEO’s yearly bonus check. All the investments in political campaigns, all the lobbying in Congress, all the public relations to produce too big to fail, to guarantee that no matter what they might do to the economy of America or how little they do to promote the creation of wealth of the nation as a whole, their ability to move paper, to manipulate the largest stock market in the world, to operate outside the country, to profit from the build up of a bubble and the crash to enrich themselves and an elite group of bankers and investors is paramount.

    The average American wonders how these people can make bonuses when they lose money and make money. We give them two trillion dollars, don’t tell Americans the details of the six page deal and our reward: They brag about too big to fail, they laugh in our faces and admit we may have to do this all over again in five or ten years.

    Is there a bonus for Geitner and the taxpayers for negotiating a 100% payout from bankrupt AIG? How much did that deal help Goldman’s bottom line?

    How much profit was made from encouraging investments while betting against those same investments?

    “Hey I have a great deal on a house, low interest, no down payment, no credit check” but let’s not mention that it is a fire trap and plugging in a hair dryer will burn the place to the ground. And lets triple the fire insurance for ourselves and hope it burns to the ground so we can pick up a nice fat bonus.

    So like all the other citizens out here in the world where we had to memorize the ten commandments and learn how God can strike you down we wonder how to get our pound of flesh from these people.

    We know they won’t go to jail or feel remorse; we know they won’t pay their fair share of taxes or have the way they do business changed and will never ever have to get a second job to make ends meet.

    We do know they love money, even when they couldn’t possibly spend what they make in a lifetime.

    Our only weapon, our sharp end of a stick, our feeble assault, our cry to get their attention is to take their bonuses. Yet in the end we will not out, of our vision of fair play in America.

    We need to talk about what we can do to end this manipulated and perverted version of capitalism, to set this country back to being the vibrant, productive, economy that puts its working citizens first. When will that conversation begin?

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