Washington keeps failing to rein in banker pay
Ten years ago, Wall Street crashed the economy after some bankers committed massive fraud so they could pocket billions in bonuses.
Since then, here’s the number of senior bankers imprisoned for this fraud: zero.
And how much success has Washington had in reforming misplaced pay incentives that drove the fraud? Also zero.
One trader at Goldman Sachs last year made $100 million. The chief executive of Wells Fargo got a $15 million bonus and $17.4 million in total pay, despite ongoing misconduct by the wayward behemoth. This week, the New York State Department of Labor reported that average pay for New York City broker-dealers rose more than 10% to $422,500 in 2017.
A report from Public Citizen and the Institute for Policy Studies published in April found that among the largest four megabanks — JPMorgan, Bank of America, Wells Fargo and Citigroup — the average pay ratio between executives and workers in 2017 was 319-to-1. A typical employee would have to work a full year before earning as much as the chief executive pockets in a single day.
When one measures the grip of the Wall Street lobby on Washington, nothing is more telling than these results. Where it matters to individual bankers, reform has left them personally untouched.
What caused the Wall Street crash 10 years ago this month is clear: fraud, sleeping cops, overleveraged banks and overdosed pay.
Because banks couldn’t pay their own debts, Washington forced taxpayers to bail them out. Then in 2010, Congress approved a law that attempted to address the key problems, the Dodd-Frank Act. Since then, Washington regulators have taken steps to implement many of the law’s important regulations, with one glaring exception: The one that hits the bankers in their wallets.
Pay played a central role in the fact that bankers crashed the economy. Mortgage originators pocketed fees as they flooded the market with expensive mortgages, and those fees escalated with more expensive loans. Many lenders intentionally signed up borrowers to higher-rate loans (the now-infamous subprime loans) because the lender earned more than with a conventional, cheaper loan. Securitizers packaging these loans also made money in this process.
Lehman Brothers declared bankruptcy Sept. 15, 2008, a move that sparked financial contagion throughout the system. In the year before, Lehman paid 50 employees (who were not the senior executives) a collective $700 million in compensation. The best-paid workers received $51.3 million, a raise from $44 million the year before, and 1,000% more than the $3.7 million they received in 2005. Most of these 50 employees received raises in 2007. This means they were rewarded for sending Lehman on the path that led to bankruptcy.
Since the passage of Dodd-Frank, regulators have reduced (slightly) bank dependence on borrowed money by increasing the amount of required bank capital. In addition, the Consumer Financial Protection Bureau has policed unscrupulous lenders making predatory, abusive loans.
But just as Washington sent no bankers to prison for the massive fraud found in legions of Justice Department cases, Washington has failed completely to fulfill Congress’ pledge to tame the excessive pay practices underpinning the crash.
Section 956 of Dodd-Frank provides a minimal statutory safeguard on pay incentives. Bankers must not pay “excessive” compensation, and pay should not lead to “inappropriate risk-taking.” Congress understood the central role of pay in the crash, and unlike almost all the other 400 rules from Dodd-Frank, set a deadline for implementation: May 2011.
It is now more than seven years later, eight since the passage of Dodd-Frank, and ten years since the compensation-caused crash, and Washington still hasn’t touched the wallet of a single banker.
The financial industry has spent billions to influence federal lawmakers and lobby regulators, and even has managed to staff financial regulatory agencies throughout the Trump administration with their own alumni. So it should come as no surprise that Washington is reluctant to do anything that might rein in banker compensation.
Still, at least until recently, financial regulators made symbolic gestures in that direction. Twice a year, the regulatory agencies list their agendas for rulemaking. Until the end of the Obama administration, the five bank agencies charged with implementing the pay rule listed this rule as a priority.
In 2016, they issued a limp proposal that largely leaves it to the board of directors to oversee pay. Even when a banker engages in misconduct, the rule only urges the board to recoup some of the bonus. After Wells Fargo’s fake-accounts scandal, the bank clipped the pay of two senior officers, but they still pocketed tens of millions.
Real reforms could change Wall Street. For example, if banks sequestered a sizable fraction of senior bankers’ pay into a pot, and used that pot to pay penalties for misconduct, pay would be aligned with honest banking. Former New York Federal Reserve Bank President William Dudley has advanced this idea.
But the Trump administration has expressed no comment on pay reform. The regulatory agenda doesn’t even list this statutory mandate, despite Congress requiring that it be finished by May 2011. Regulators are going the wrong direction on this issue.
Until Washington reforms banker pay, we should expect more misconduct, if not outright catastrophe.