It's not a fun time to be an American taxpayer. There's nothing quite like learning that CEOs from some of the biggest banks your hard-earned money helped bail out made more last year than their firms paid back to Uncle Sam.
A damning report just issued by the Institute for Policy Studies (IPS) demonstrates that CEOs continue to game executive compensation at the nation's biggest financial institutions, incentivizing Las Vegas-style risk taking that no taxpayer should ever have to underwrite. The report also examines the Dodd-Frank Wall Street Reform Act intended to deal with this problem; it was approved by Congress more than two years ago but as Public Citizen has also noted, regulators have in many cases failed to implement it.
U.S. Sen. Sherrod Brown (D-Ohio), a leader in Senate financial issues, thinks that regulators should no longer play along with the executives' game. On August 13, he fired off a six-page epistle to six financial regulatory agencies that police Wall Street, demanding that the rules to implement Dodd-Frank's executive pay sections be put into place. Public Citizen agrees and seconds his call for action.
In its 19th annual survey of CEO pay, IPS found that last year, 26 companies paid their CEOs more than the firms paid Uncle Sam in taxes. Two of those are Citigroup and AIG, which owe their very existence to taxpayer bailouts. The list exceeds the 25 companies IPS identified in last year's report.
Rich compensation plans encouraged bank executives to make risky bets and choices for their institutions. This year's IPS pay survey shows that the CEOs haven't changed their game.
Bonus boom, bank bust, bailout. Repeat.
Brown, who chairs a subcommittee of the Senate Banking, Housing and Urban Affairs Committee, wants to end this vicious cycle. Congress approved the Dodd-Frank Wall Street Reform Act to accomplish this end. However, Wall Street's lobbyist SWAT team deployment seems to be paying off, as one of the key provisions of Dodd-Frank not yet implemented is Section 956, which authorizes regulators to block executive pay that leads to "inappropriate" risks.
Brown's letter documents past and continuing pay-related problems. For eight years leading to the financial crash of 2008, the top five executives of Bear Stearns and Lehman Brothers received a collective $2.4 billion in bonuses before crashing their firms. Brown notes that, "these compensation arrangements provided top bank officials with incentives to seek short-term profits while creating a risk of large long-term losses."
Brown notes that even now, misaligned bonus incentives likely motivated JPMorgan's chief investment office trader Bruno Michel Iksil, also known as the "London Whale," whose choices led to at least $5.8 billion in losses for the company. His risky trades caused a 20 percent decline in the value of the company. In addition, the recent LIBOR fraud, Brown writes, "shows that derivatives traders at British bank Barclays" manipulated the rates because "presumably [their] bonuses [were] based upon such figures."
The critical executive pay reforms contained in Dodd-Frank to decouple risk and executive compensation are languishing in the rulemaking process. This stalled rule should receive congressional attention and immediate agency action.
Let the games be done.
Follow Lisa Gilbert on Twitter: www.twitter.com/Lisa_PubCitizen
1. Create Holding Co.
2. Acquire Controlling Shares
3. Appoint oneself CEO
4. Fire workers
5. Convert Employee retirement into profits
6. Sell off Production, Business and Services Equipment
7. Sell off buildings and land
8. Get Government Loan
9. Stiff the shareholders, management, loan sources, and board
10. Declare bankruptcy
11. Give oneself offshore bonus with proceeds
12. Reorganize under new name
13. Buy next company.
And they will be. Maybe the CEOs know something most of us don't: this whole system has a good chance of going down in flames. They are bailing out with golden parachutes, milking the system for all they can, while they can.
Imagine them as Bernie Madoff going out to dinner the night before he has to "go downtown to answer a few questions" - are you really going to order the cheapest wine on the list? If you're part of the Ponzi Economy, there's not much incentive for restraint.
Of course. That was the original intent. These laws are designed to be vague and without teeth so that they can be selectively enforced to suit the political whims of the moment. That was observed of this law well before Congress ever passed it.
Nobody cares what's IN the bills. All they sell is the names. If it is the Wall Street Reform Act, it must reform Wall Street. Wrong. If it's the Patient Protection and Affordable Care Act it must protect patients and make care affordable. Wrong. If it's the American Clean Energy and Security Act it must make energy clean and secure. Wrong.
Without REAL lobby reform and campaign finance reform this country will be an oligarchy soon if it isn't already, while the media focus's on gaffe's and technicalities that distract from the real issue of what allows this behavior to continue and who finances it.
"Big banks’ ability to extort such an arrangement stems from an implicit threat: the financial sector – and with it the economy’s payment system – would collapse if a systemically important bank were ever pushed into insolvency. But it is time to call the bankers’ bluff: maintaining the payment system can and should be separated from the problem of bank insolvency. All that is required to revive effective bank regulation – in Europe and elsewhere – is the will to resist blackmail by the banks themselves.
http://www.project-syndicate.org/commentary/calling-the-big-banks--bluff-by-frank-sch-ffler-and-norbert-f--tofall