“Well written and an interesting perspective.” Clan Rossi --- “Your article is too good about Japanese business pushing nuclear power.” Consulting Group --- “Thank you for the article. It was quite useful for me to wrap up things quickly and effectively.” Taylor Johnson, Credit Union Lobby Management --- “Great information! I love your blog! You always post interesting things!” Jonathan N.

Friday, September 30, 2011

Executive Compensation (Part I): Systemic Risk

In the wake of the financial crisis, according to the Huffington Post, “a number of the nation's largest banks were excused from the government's rescue program before they had returned to a position of complete financial security -- in part because they wanted to avoid restrictions on how much their executives would get paid, according to a new report from the program's government overseer. Citigroup, Wells Fargo, PNC and Bank of America successfully lobbied to leave the federal bailout program early in 2009, even though the Federal Reserve Board and the Federal Deposit Insurance Corporation had recommended they take additional steps to shore up their assets, according to a new report from the Special Inspector General for the Troubled Relief Asset Program, a government watchdog office. Regulators, including the Treasury and the Federal Reserve Board, eventually ‘relaxed’ their criteria for letting the banks out of the program, the report says, leaving questions about whether the banks had strengthened their holdings enough to be able to withstand another systemic crisis.”

The Huffington Post reports that according to SIGTARP, in 2009, the “four banks repeatedly tried to leave the bailout program, also known as TARP, ahead of schedule, claiming that the stigma attached to the bailout would damage investor confidence in their stability. Bank of America was especially persistent, submitting 11 separate exit proposals to the Federal Reserve Board in less than a month. The banks, particularly Citigroup and Bank of America, also expressed concern that if they stayed in TARP, they would be subject to the program's restrictions on executive compensation.

"Ultimately, the federal banking regulators ended up bowing to pressure" to let the banks leave early, said Christy Romero, Acting Special Inspector General for TARP and the author of the report. Romero added that in the event of another shock, many banks could be left with too little capital to endure, raising the possibility that "it could potentially trigger an avalanche of severe consequences to the broader economy." As a result of the regulators’ lenience, Romero told The Huffington Post, the financial system is still carrying considerable systemic risk from huge, interconnected banks, well after the meltdown of 2008. "The institutions that were 'too big to fail' ... are bigger than they were before," said Romero. "It's very critical that regulators remain vigilant to banks' demands to relax capital requirements."

In short, the U.S. Government and its central bank, the Federal Reserve, acquiesced on bank executive’s desire for more (i.e., greed) at the expense of reducing systemic risk. That the bankers presumed themselves as being in a position to lobby—especially to obviate compensation restrictions —given the roles played by the banks in the mortgage securities crisis, is astounding, as is the obsequious reaction of the regulators. The dynamic itself evinces the U.S. as a plutocracy rather than as representative democracies. Furthermore, the motive of the bankers demonstrates a continued fixation on gain at the expense not only of the system (i.e., systemic risk), but also of stockholders.  In Part II, Executive Compensation: Paying Failure, I discuss the lack of accountability on executive compensation from the perspective of stockholders.


Alexander Eichler, “BofA, Wells Fargo, Citigroup Left TARP Early to Avoid Restrictions on Executive Pay,” The Huffington Post, September 30, 2011. http://www.huffingtonpost.com/2011/09/29/banks-tarp-bailout_n_988148.html