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Catfight over clawing back banker pay

Karen M. Kroll | Sept. 27, 2011
For a month now, the Federal Deposit Insurance Corp. has had the power to recoup compensation paid to execs with financial institutions -- if, that is, the institution is taken over by a government agency, and it's shown that the executive acted recklessly. But whether this new regulatory ability will discourage excessive risk-taking on the part of executives, or simply will limit their ability to do their jobs, is being hotly debated. "

For a month now, the Federal Deposit Insurance Corp. has had the power to recoup compensation paid to execs with financial institutions -- if, that is, the institution is taken over by a government agency, and it's shown that the executive acted recklessly. But whether this new regulatory ability will discourage excessive risk-taking on the part of executives, or simply will limit their ability to do their jobs, is being hotly debated. "

Section 380.7 under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which took effective Aug. 15, allows the FDIC, as the receiver of a financial company, to "recover from senior executives and directors who were substantially responsible for the failed condition of the covered financial company any compensation they received during the two-year period preceding the date on which the FDIC was appointed as receiver, or for an unlimited period in the case of fraud."

As most executives know, their compensation -- particularly if they work at a financial firm that accepted monetary help from taxpayers -- has become a flashpoint among the public. Between 2006 and 2008, the top five executives at the 20 banks that accepted the most federal bailout dollars, at that point in the financial crisis, averaged $32 million each in personal compensation, according to the Institute for Policy Studies, which bills itself as a progressive think-tank.

Structure Matters

Perhaps more than the level of executive compensation, its structure, particularly within the financial industry, has become a concern. "Is executive compensation, as it's established within the financial industry, conducive to increasing moral hazard and risk taking?" asks Gerald Hanweck, professor of finance at George Mason University, and previously a visiting scholar with the FDIC.

"It certainly is," he answers his own question.

While it might be a stretch to accuse top financial-institution executives of ignoring risk, some certainly fail to factor in the full cost of that risk, Hanweck says. Consider the packages of mortgage-backed securities that some financial institutions created, ostensibly using credit default swaps to hedge against the risk of the loans going sour. Many of the swaps that were created, however, failed to reflect what was underlying them: "a cruddy bunch of mortgages," as Hanweck phrases it.

The Sides Square Off

Even some who support revamping executive compensation, particularly within the financial sector, question whether handing the FDIC authority to recoup money from negligent executives shown to be negligent in their leadership is the most effective way to go about this.

Some insist that it is, of course. A letter from the Council of Institutional Investors submitted to the FDIC in May reads, in part: "We encourage the FDIC to exercise its authority to the fullest extent possible by establishing broad criteria for recouping compensation from executives responsible for the failure of a covered financial institution."

 

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