Wednesday, January 13, 2010

Sheila Bair, May I Kiss Your Hand???

Binyamin Applebaum has a terrific story in the Washington Post.*  Applebaum focuses on a proposal made by the FDIC.  The proposal, made by the FDIC, is made to stimulate public discussion of penalties for compensation practices which reward excessive risk-taking by bank executives.  Of course those risks are being taken with depositors' and savers' money, and more recently taxpayers' money.

As Applebaum writes, (I'm paraphrasing) the general public's anger (in some cases rage and ire) over investment banker's salaries and bonuses has failed to convince Washington D.C. lawmakers to change the status quo on pay systems which reward poor performance, excessive risk-taking, and record losses.  Almost all big banks would have gone insolvent in a matter of days, if not for the taxpayer bailouts. Currently the Washington D.C. congressmen (ninnies, my commentary) are debating the very modest notion that salaries should be directly correlated with long-term performance.

The FDIC is considering a plan to reduce fees for companies (obviously banks) that take specified steps like paying bonuses in the form of stock which cannot be sold in the short-term.  Banks that do not comply will be required to pay higher fees to FDIC,  so those banks which encourage an executive culture of excessive risk will be forced to pay higher insurance.

The concept is actually quite easy to understand.  It's the same if you are involved in 1 or more auto accidents. You show yourself to be a high risk driver, then your insurance goes up.  Maybe you were using your mobile phone, drinking a beer, putting lipstick on in the mirror, etc....  Those are risky behaviors when driving.  Your incentive for those risky behaviors???  Saving time.  Should the jerk who drives that way pay the same auto insurance as you???  That's what Investment banks like Goldman Sachs are asking depositors and taxpayers to do under the current laws.  Why shouldn't banks which reward excessive risks pay more insurance than the banks that reward an environment which protects their depositors and protects the taxpayers????  This is the question Sheila Bair and many others are asking.

Quoting directly from Applebaum's piece:
"FDIC Chairman Sheila C. Bair said that 'a growing body of evidence and common sense and academic literature' showed that bonuses for short-term performance had played a role in fomenting the financial crisis. She said the FDIC's approach would reinforce guidance from the Federal Reserve instructing companies to tie compensation to long-term performance."
A man by the name of John C. Dugan is trying to stop Sheila Bair's proposal.  Journalist Zach Carter writing in The Nation has already exposed John C. Dugan's appearance as a lackey for big banks. Alternative link here at Barry Ritholtz site.

Sheila Bair responded to John C Dugan's very shallow remarks.  Here again I quote directly from Applebaum's story:

"Bair said the timing of the proposal was important because some banks wanted to reform pay practices but feared that competitors would gain an advantage. By offering financial incentives, the FDIC could help banks justify the decision to implement reforms, Bair said.
She offered her own sharp comments in response to the remarks by Dugan and Bowman, emphasizing that at this stage the FDIC 'was simply asking questions.'
'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. 'I also cannot understand why we need to keep waiting. We need to keep waiting for this or that, and in the interim, nothing changes.' "

Sheila don't feel bad---WE DON'T UNDERSTAND EITHER.

(hat tip to baselinescenario for the Dugan story links)

* The editor of this blog has "prohibited" the writer of this blog from linking to any Washington Post stories, but the writer snuck this one in just before press time, because Applebaum's journalism is just too good.  The editor and writer of this blog inhabit the same person. Shush!!! They'll start fighting again.

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