Meet Mr. Ticker. He’s the hypothetical rogue banker described in Washington’s newly proposed rule to reform Wall Street pay.
Six federal agencies charged with overseeing Wall Street — from credit unions to mega-banks — are proposing rules to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This section charges them to write rules that prevent “excessive” pay packages that lead to “inappropriate risk-taking.”
The proposed rule spans 280 pages, most of which consists of explanation of the rule. The actual rule is about 20 of these pages. In an effort to communicate in “plain English,” the agencies describe hypothetical bankers Ms. Ledger (who’s honest) and Mr. Ticker (who’s not).
In the inevitably prudish lexicon of the banking agencies, “Mr. Ticker is a significant risk-taker who is the senior manager of a trader and a trading desk that engaged in inappropriate risk-taking in calendar year 2021, which was discovered on March 1, 2024. The activity of the trader, and several other members of the same trading desk, resulted in an enforcement proceeding against ABC and the imposition of a significant fine.”
Restated, Mr. Ticker and his team manipulated markets, and successfully hid it from the board for three years.
The fictional Mr. Ticker manipulated the markets, of course, to make himself a pile of money. That’s the same motive behind the Huns of Wall Street who actually did crash the economy in 2008. That’s why a central statute of President Obama and Congress’ 2010 Wall Street reform aimed to repair the perverse compensation incentives. Only now, six years later, have the regulators come around to draft the specific rules for pay, including pay for crooks. Alone, this delay has been discreditable.
And how do the regulators propose to punish Mr. Ticker? How will they change the rules so rogue traders don’t profit from their misconduct? What frightful fate awaits, so that Mr. Ticker won’t even contemplate crossing the line?
“In this case, [Mr. Ticker’s bank] decides to defer $30,000 of Mr. Ticker’s incentive-based compensation for three years so that $10,000 is eligible for vesting in 2022, $10,000 is eligible for vesting in 2023, and $10,000 is eligible for vesting in 2024. No adverse information about Mr. Ticker’s performance comes to light in 2022 or 2023 and so $10,000 vests in each of those years. However, Mr. Ticker’s inappropriate risk-taking during 2021 is discovered in 2024, causing ABC to forfeit the remaining $10,000. Therefore, the amounts that vest in this case are $10,000 in 2022, $10,000 in 2023, and $0 in 2024.”
That’s it. That’s Washington’s idea of punishment. The bank identifies a senior employee who violates the law. If they catch the infraction within three years, they’re encouraged to haircut a portion of the incentive part of his pay by about a third.
It’s really even more lenient than this. Regulators say that only half of the incentive pay must be deferred. And the incentive part is on top of the regular pay. For example, the average bonus for Wall Street investors in 2015 was $146,200, according to the New York State Comptroller. That’s on top of $258,000 in regular pay. (The regular pay figure is actually for 2014; the bonus figure from 2015.) In other words, Mr. Ticker would receive half of the $146,200 immediately, leaving $73,100 deferred. He then pockets two-thirds of the $73,100 before his bosses catch on to his illicit scheme. In the end, he only forfeits $24,366. The penalty for misconduct for Mr. Ticker, who is paid $404,000 a year, is $24,366.
There’s even more leniency than that built into the proposed rule. Washington only requires the bank “to consider” this haircut. The regulators themselves won’t order a pay penalty. Nor do the regulators propose requiring that the pay penalties be disclosed publicly.
At Citigroup’s annual meeting April 26, I asked CEO Michael Corbat if the firm clawed back pay for misconduct. Yes, he said. Who were the individuals, I inquired. Their names are confidential, he replied. How many had pay docked for the fraud allegations Citi settled in various government arrangements, I pressed. He said that number was also confidential. Given that management failed to prevent what the government claimed was massive fraud, a cynic might question whether one should trust this same management to claw back money from its wayward Mr. Tickers.
Public Citizen supports full disclosure. If the price of misconduct includes the publication of names, that can bolster deterrence.
We also support much longer pay deferral periods. In early April, 2016, Goldman Sachs paid a $5 billion penalty for to settle claims of misconduct dating back to 2006. Presumably, all those Goldman employees who profited from this alleged fraud have long since purchased their yachts and Hampton retreats.
New York Federal Reserve President William Dudley (a Goldman alumnus) proposes pay clawbacks with real teeth: a substantial portion of pay would be set aside 10 years for a reserve that can pay for these sorts of penalties without regard to whether the senior employee committed the fraud. That would incentivize a new culture of fighting corruption within the ranks and C-suite. And while an innocent managr might suffer, the current system punishes the innocent shareholder. Or worse, the whole economy suffers. Ideally, the bankers will operate within the law and everyone gets paid — eventually.
While disappointing, this proposal remains just that; a proposal. The agencies now formally invite comment. These are due by July 22. Regulators must hear from the public — experts, victims of Wall Street abuse, vegetarians, libertarians, librarians, — who should convey the importance of strengthening this rule.
Comments can be sent to any or all of the following:
We need to stick it to Mr. Ticker.
Bartlett Naylor is the financial policy advocate for Public Citizen’s Congress Watch division.