06/23/2010 11:19 am ET Updated May 25, 2011

Bank Compensation Cartels

Adding to yesterday's comments, banks are run by Compensation Cartels. They buy the myth of superhero financial status, despite the fact that they consistently destroy long term value at banks. Any major bank ownership group consists of two classes of owners: those from banks that were acquired and have shares of the new institution in exchange for shares of their purchased institution and new owners who trade the stock. The legacy owners consistently get the shaft. This is because of the pay cartels rule decision making, taking excessive risk for excessive pay. The Federal Reserve notes that pay practices have not changed enough. I can tell you that the macro pay philosophy has not changed at all.

What is best for our superheroes is a volatility in stock price. When the stock price is down, their option strike prices get set low and their restricted stock awards garner more shares. When the risks pay off for a few quarters and the market is good, the stock can be sold. Even those who are required to hold stock long term, the very top people, benefit from the lower strikes and greater share awards. They just have to wait. All those shares will pay a dividend one day though, so the pain for holding them is not too great.

The Federal Reserve has completed an initial review of compensation policies at 28 large banks it oversees and has been giving them confidential feedback on areas where they must change. On Monday, the Fed and other federal regulators issued final guidelines, stressing the need for policies that do not give executives, traders, and other bank employees incentives to make overly risky investments that might earn them huge bonuses in the short run while leaving the bank exposed to losses in the long term.

Good work there on the part of the Fed. Real cutting edge stuff.

At least they are beginning to address the problem.