Since Wall Street obviously learned nothing from last year and feels it is entitled to reward itself for the debacle it has created, the Fed is now setting the stage for further action unless the financial sector cleans up its act on compensation.

I would prefer strict wage controls, but I'll take this as a start.

From the LA Times:

Federal Reserve proposes ideas to limit financial risks taken by banks
The initiatives would apply to all employees who 'have the ability to materially affect the risk profile' of a bank, from senior executives to lower-level traders and mortgage officers
Jim Puzzanghera
October 22, 2009

Reporting from Washington

The Federal Reserve today proposed two sweeping new initiatives to review the practices of awarding bonuses and other incentives at hundreds of banks in an attempt to reduce risky practices that helped trigger the financial crisis.

"Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability," said Federal Reserve Chairman Ben S. Bernanke. "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

As an example of incentives that encourage risk, a senior Fed official pointed to bonuses based on writing a lot of loans or generating a large amount of trading revenues, without taking into account the riskiness of the loans or trades. The Fed is not setting any dollar limits on compensation practices.

The Fed's review will cover pay policies for all employees -- from senior executives to lower-level traders and mortgage officers -- who "have the ability to materially affect the risk profile" of a bank either on their own or acting as part of a group, such as a trading division. The reviews would be tailored to the individual banks and the type of business they conduct.

The rules would apply to the approximately 6,000 banks the Federal Reserve supervises as part of the central bank's regulatory function. The 28 largest banks supervised by the Fed will get special scrutiny. The Fed did not identify those "large complex banking organizations" but the Fed oversees large bank holding companies, such as Bank of America, Citigroup and Wells Fargo.

The Fed's announcement came as the Obama administration's pay czar, Kenneth Feinberg, prepared today to announce plans to slash the compensation of top executives at the seven biggest recipients of federal bailout money. He will reduce the total compensation of the 25 highest-paid executives at each company 50% from what they received last year. Cash pay would be cut by an average of 90%, with some of the lost pay replaced by stock grants that executives would have to hold for a set period of time.

Such restricted stock is believed to reduce the incentive for risky short-term decisions.

The Fed's review will focus on getting banks to balance their compensation practices to reduce risk-taking and the findings will be used as part of the bank's overall regulatory rating. If the Fed finds some pay practices encourage too much risky behavior, the Fed could require the bank to correct them. The changes include requiring employees to pay back compensation already earned, a process known as "claw back."

The foxes are in charge of the hen house. All of these people are bankers or were bankers. Their mindset just isn't one that truly believes in regulation.

Can you honestly say that you're pleased with the fact that under the Obama administration Wall Street still isn't regulated?

I'll believe that the financial industry is going to regulate itself or that the government is going to do it when I see it. All I see is bankers taking huge "bonuses" as if the bailout never happened.

quote:

Originally posted by Daniel:
Can you honestly say that you're pleased with the fact that under the Obama administration Wall Street still isn't regulated?

No. But I understand why it is not yet done. The real regulation that is needed can only come with a change in legislation. Obama's Administration proposed their package last Spring, if I recall correctly.

I don't think the President can fight against all of the most powerful industries at one time. Should he have put aside health care and done financial reform? I don't think so. But with health care wrapping up, we now see movement coming on financial reform.

That is what I really expect. Get the fight over with the medical-industrial complex and move on to the next group of massively powerful people -- Wall Street.

And when that one is done, he can move on to the next group of very powerful people -- the oil industry.

I don't expect miracles from the guy. I just expect him to get the one done, move to the next. Get that one done, move to the next one.

Actually, what really makes me mad is that he has to spend this much time regulating these people at all. There are others things we need to be dealing with and having to fight a major fight to take care of children because they cannot behave themselves is very frustrating.