Announcing the arrival of the 956

The 956 is arriving in Washington D.C. presently

No, it’s not a train. It’s a section of the Dodd-Frank Wall Street Reform Act. And it’s one of the most important parts of this otherwise sprawling law because it aims to reign in the incentive compensation of Wall Street executives that many say caused the crash. This provision separates short-term success from compensation and instead aligns pay with long-term performance.

The 956 will arrive very close to Union Station, as the Securities and Exchange Commission is next door, and is one of the seven Wall Street police agencies putting out the rule. Any day now, these seven regulatory agencies will co-publish what’s called an invitation to comment on a proposed rule.

To meet this arrival, Public Citizen is preparing material in the hopes of informing and empowering our readers and members. We think it should be common knowledge that

a. mis-constructed pay packages, in part, fueled the crash that led to our current economic woes (14 million unemployed, millions displaced from homes, college graduates facing bleak prospects); and

b. that you, personally, can do something about it

When the rule is published, the rule-makers will invite comment and be actively looking for ideas on how best to refine the way they regulate bank pay. Your ideas do count. We spoke with a senior official at the Federal Deposit Insurance Corp;  and he said he reads them personally and takes them seriously. The FDIC, by the way, is the agency that protects your savings account when those bankers gamble on high risk ventures. Amidst the many thorns in the thicket of rogue banking regulatory accomplices, leaders such as this senior official and FDIC Chair Sheila Bair have been roses.

You’ve received a paycheck. You know that how you get paid affects how you perform. You may be or may know a banker, such as loan originator, or officer or even executive. Talk with them about how best to structure pay so it doesn’t incentivize gambles with FDIC-insured deposits.

Surveying the academic literature, three basic solutions present themselves:

1.       Delay compensation so as to make sure the loans made this year remain good loans in three or fou r years. Specifically, this means paying bonuses in a delayed fashion, say, on a three-year lag.

2.      Tie bank compensation to a risk measure, such as the bank’s bond price, or some metric that prudential banking agencies (who monitor bank safety) devise.

3.      Empower boards to claw back pay from years when the seeds of wreakage were sown.

 

Again, Public Citizen will help interested Americans write to senior officials and the other regulators of good faith to help them make sure the 956 gets on the right track. Look for an upcoming email from Public Citizen with details on how to submit your comments and ideas.

All aboard."Bart Naylor" "Financial policy"