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Pat Choate Headshot

It's Time to Control America's Big Bankers

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Let's begin by agreeing that the boards and management of America's largest banks are venal, shameless, irresponsible and indifferent to the well-being of the rest of the American people. Can we also agree that their reckless acts almost destroyed the world economy and harmed tens of millions of Americans, many irreparable?

Though we may agree on these fundamentals, my question is whether imposing a massive federal tax on the bank's earnings and the bankers' bonuses is the correct response. I think not.

Think about this for a moment: Where would these new monies go? This is what troubles me. It would be in the hands of the Congress and Administration. While in political theory, that may be appropriate, in political practice, these policymakers lack a sterling record for wise expenditures, and the likelihood of them using the monies responsibly, such as reducing the federal budget deficit, is tiny, if that large.

Instead, I am intrigued by the idea put forth by the Federal Deposit Insurance Corporation (FDIC) that its reserve funds be increased significantly via new levies on the banks that got the bailout monies - and by bailout monies I mean either directly through TARP or through sweetheart loans from the Federal Reserve System. These reserves are a bank-funded insurance program whose purpose is to pay for mistakes made by the bankers and safeguard depositors' holdings.

If a driver had a record of wrecks comparable to that of these large banks, they would be uninsurable. At a minimum, therefore, these banks should contribute enough to the FDIC reserve to pay for the next financial bailout, which is now inevitable because their lobbyists have successfully derailed reform legislation. When this crisis began, the FDIC had a reserve of more than $48 billion, which quickly disappeared. Based on this most recent experience, a future insurance reserve roughly equal to TARP, such $700 billion, might provide enough coverage to protect Americans taxpayers from another banker raid on the Treasury.

As to the bonuses of the individual bankers, the Federal Government should limit annual cash payments over some fixed amount, such as $500,000, and force the payment of any bonus with stock in the company. Also, the sale of the stock should be prohibited for some long period such as 5 years or more.

I don't think we should not care if bank stockholders are willing to dilute their own stock position so these executives have a greater share of the corporate ownership. Nor should we care if that stock makes the bankers a zillion dollars in future years. What we the public should seek is a compensation system whose incentives encourage the pursuit of long-term returns rather than short-term and speculative gains, irrespective of the longer-term consequences.

Amazingly, America's top bankers seem to be politically deaf to this bonus issue. JPMorgan Chase announced on January 15, 2010 that it had earned $11.7 billion in 2009 and would be paying out $26.9 billion in compensation, much of which would be in large bonuses. Similar whale-sized payouts are expected from the other giant banks that almost destroyed the world economy.

Politically, the bankers' extraordinary greed is useful because it will generate the public outrage needed to force Congress and the Obama Administration into action. Put another way, no sane politician will defend these payouts nor vote against legislation to control the bankers' excesses.

Another benefit is that many bankers may find these two proposals so unattractive that they will resign and seek other jobs. Nothing could be better for America than to change the leadership of our major banks with people who are less greedy and much more focused on the long-term. And if the departing bankers are as skilled as they claim, they may even find work that makes a real contribution to the U.S. economy.

In sum, the bankers' greed, obscene bonuses and obvious indifference to the public is creating a new political crisis that will give the Obama Administration a second chance at financial reform. Let's hope the President makes better use of this crisis than he did the first one.