Bankers from the nation’s 28 largest banks were called to regional Federal Reserve offices across the country today to get a message from the agency. That message was that they should not wait for new guidelines that will align banker pay with risk. They should guess what the guidelines will be and apply them to 2009 pay packages. Bankers have not been very good at being bankers for the last two years and asking them to be clairvoyants as well seems too much.
The Fed is in a rush to prove that it can have a meaningful role in permanently changing the financial industry infrastructure that it believes brought the credit market to its knees. The Treasury has started its own process along those lines, at least in the compensation arena, by bringing in a pay czar to set limits on compensation at firms which have not repaid TARP money. The Fed’s leverage with financial firms that do not owe the government money is a bit less certain. It not only has no specific pay guidelines for banks yet; it may not have any real right to set them. It would not be surprising if the matter ends up in federal courts at some point, but that does not help the banks now.
The Federal Reserve has tried to remain remote from most of the political turmoil that has accompanied the financial crisis. It has that ability and that right because of the way that it is chartered and the role that the Fed chairman has played in the economic policy life of the country for decades. The Fed elected to reject its former position on top of Mount Olympus to help the mortals when it looked like the financial world might be destroyed. The Fed has discovered that there may be no going back. Congress and the public expect the agency to take an active part in retooling the banking industry. That is, in and of itself, political. So far, Mr. Bernanke has gone along with and has even publicly supported the Fed’s new position by being a regular part of the TV talk show circuit and permanent guest of the House and Senate.
Bernanke has publicly avoided speaking about the two major results of the agency’s new role although he probably agonizes over them in private. The Fed may simply want to get back to its traditional roles of setting monetary policy, acting as a temporary means of access to capital for large institutions, and regulating the banking industry without trying to revolutionize it. The Administration has floated several ideas which would take the Fed’s mission well beyond what it has ever been by making it the “financial regulator of all financial regulators.’ Bernanke has suggested that this umbrella role be handled by an oversight council and not his agency. It still seems that Congress believes that taking a number of crippled agencies that did nothing to stop the financial crisis and several large financial frauds and putting them together somehow makes the regulatory system stronger.
The Fed’s notice to bank executives that they need to tie pay to risk immediately and not wait for formal guidelines is another example of the government’s belief that it is alright to usurp the role of corporate boards and compensation committees and the shareholders who elect them. Banks that owe TARP funds at least fall into a different class. The government is one of their major “stakeholders”, if not their largest one. It has by that ownership some of the actual rights of ownership. Independent financial companies, especially those which are publicly-held are still ruled by a governance system which has worked for decades with only modest modifications. And, bank boards are, based on the catastrophe of the last year, almost certainly hyper-vigilant about bank risks. The Fed wants to undermine roles which boards are almost certain to do well on their own.
The Fed has now told the big banks what they have to do as they pay their managers for 2009 performance. Many of the firms are likely to make public statements about their rights being trampled. All of them are likely to go along with the Fed’s requests, even without new written rules. Bank boards can take the rest of the year off and simply collect their meeting fees. Fairly soon, there will be nothing more for them to do.
Douglas A. McIntyre
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