The Hunt for Banker Pay Reform
A Whodoneit Where A Reader Maybe Done It
By Bartlett Naylor
Laws have a legislative history, and legislative parents. Often, these histories are colorful, sometimes intense, occasionally tragic, as with the events that led to passage of the Civil Rights Act of 1964. The parents of this law are many. Some are famous, such as Martin Luther King. Some are less famous, such as Emmauel Cueller, the member of Congress who helped draft and shepard the law through Congress. In banking, Roger Lowenstein wrote a book about the legislative history that led to establishment of the Federal Reserve in 1913, called America’s Bank. The legislative parents of this important law are also many, some famous, such as William Jennings Bryan and Louis Brandeis, and some less so, such as Democratic Congressman Carter Glass and Sen. Robert Owen.
Members of Congress whose legislation becomes law often advertise this when they campaign for re-election. Even if their ideas don’t become law, they might still emphasize that they’re pushing for reform in this or that arena, and cite the legislation they’ve drafted. Obituaries of prominent lawmakers naturally cite the important laws they’ve authored. Thomas Jefferson’s tombstone, which he wrote, mentions that he drafted the Declaration of Independence.
In 2010, following the financial crash, Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act’s principal legislative parents form the law’s name: Sen. Chris Dodd (D-Conn) chaired that Senate Banking Committee, and Rep. Barney Frank (D-Mass) chaired the House Financial Services Committee, whence this law came. Portions of this law include proud parents. Title X created the Consumer Financial Protection Bureau, the brainchild of then Harvard Prof. Elizabeth Warren. She conceived the bureau as necessary to curb consumer abuse in mortgage and other scams in a scholarly paper called “Unsafe at Any Rate,” an homage to Public Citizen founder Ralph Nader’s “Unsafe at Any Speed,” the seminal critique of automobile manufacturing safety. Section 619, known as the Volcker Rule, was conceived in a New York Times opinion piece by former Federal Reserve Chair Paul Volcker to separate the risks of speculating on securities, such as those fraudulent mortgage-backed securities, from the boring loan-making part of the commercial bank. This section’s congressional parents were Sens. Carl Levin (D-Mich) and Jeff Merkley (D-Ore). History even knows the staffers responsible for drafting this controversial and much discussed rule: Levin aide Tyler Gellasch and Merkley aide Andrew Green.
Bad banker pay practices figured as a central cause of the 2008 financial crash. Mortgage salesman got bigger fees for writing bad mortgages to people who couldn’t afford them, which were packaged into securities that generated underwriting fees and bonuses for the underwriters, and then trading fees for the banks and bonuses for the traders. Banks fraudulently sold those mortgage securities knowing they were rotten, and eventually the banks paid penalties, though not the individual bankers. None went to jail. Polls affirmed that Americans were more angry about bankers enriching themselves while millions lost their jobs, their homes, their savings than nearly every other issue. The bailout of insurance giant AIG, where the government spent $160 billion to cover its failed bond insurance department, and another princely sum in bonuses for the very AIG employees who wrote the bond insurance contracts, proved especially inflammatory to public opinion.
In response, Congress claimed to reform banker pay through Section 956, a basic, blanket injunction that states pay structure can’t incentivize “inappropriate” risk taking. It’s one of 400 rules in the sprawling Dodd-Frank Act, but one of only a half dozen that contains a deadline for completion, signifying its importance. That deadline was May, 2011.
So, who are the parents of this section in its legislative history?
Section 956 appears in the final version of the bill. Ty Gellasch, who co-drafted the legislative text for the Volcker Rule (Section 619), said it wasn’t him but thought it might be another Levin aide named Elise Bean. She led the staff of the Senate Permanent Subcommittee on Investigations, which Sen. Levin chaired. Bean and Levin’s legendary investigations revealed how pay checks led to bad banker behavior, such as how Goldman Sachs sold mortgage packages they knew would fail on behalf of a client who bet against them. Another investigation anatomized a JP Morgan disaster know as the London Whale failure. Yet another looked at how Credit Suisse helped Americans escape tax liability. In each case, bankers pocketed millions. But no, Elise said did not write Section 956. She thought it might be Kara Stein.
Stein served as the banking staffer to Sen. Jack Reed (D-R.I.) in 2010 when Dodd-Frank was making its way through Congress. Sen. Reed is a stalwart progressive who worked to ensure the final Wall Street reform law would serve average Americans when Wall Street traditionally dominated the process of bank law-making. Stein proceeded from her work with to Sen. Reed to serve as a valiant member of the Securities and Exchange Commission, where she fought promote the interests of investors at this venue where, again, Wall Street enjoys unfortunately great influence. But no, Stein said she thought Section 956 came from Sen. Schumer.
In 2010, Sen. Schumer served on the Senate Banking Committee, several years before he advanced to become Senate Majority leader. Jonah Crane served as his banking staffer. Yes, Crane reported, Sen. Schumer was responsible for marshalling all of the sections in Title IX, of which Section 956 is one part. But that specific language, Crane speculated, may have come from the chairman’s staff, namely the staff working for Sen. Chris Dodd.
Amy Friend, chief counsel to the Senate Banking Committee (before she became chief counsel of the Office of the Comptroller of the Currency) said it wasn’t her. She speculated it might be fellow committee staffer Dean Shahinian. Shahinian and staffer Levon Bagramian were known as the 49ers, as the worked on Titles IV and IX. Bagramian, now a staffer with the House Financial Services Committee, says it wasn’t them.
Charles Yi served as general counsel for the Senate Banking Committee’s majority staff under Chair Dodd. (Between Dodd and Johnson, Yi worked for Treasury. Eventually, Yi became staff director when Sen. Tim Johnson (D-S.D.) succeeded the retiring Sen. Dodd and became chair of the Senate Banking Committee. (Yi was Johnson’s second staff director following Dwight Fettig.) From there, Yi became general counsel of the FDIC, and then general counsel of the Federal Housing Finance Administration. But no, Yi emailed that he did not write Section 956. He suggested going through the drafts (which is how a genuine legislative historian would have begun this hunt).
As approved into law, Section 956 is 602 words long. It begins with instruction to the banking regulators to jointly write regulations that require disclosure by each bank of all the executive compensation structures. In particular, it asks that banks disclose whether any of this compensation is “excessive” or that the compensation could lead to a major loss at the bank. Then come the teeth of the rule. It directs the bank regulators to prohibit “any types of incentive-based payment arrangement . . . that the regulators determine encourages inappropriate risks.” That’s the gist; no compensation that leads to “inappropriate” risk taking. Then the rule lists the agencies that must “jointly” write this regulation: The Federal Deposit Insurance Corp; the Securities and Exchange Commission; the National Credit Union Administration; the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency. And it sets a deadline for completion: 270 days after enactment of the law.
It is common for lawmakers to direct regulators to detail specific regulations, as that’s supposed to be their specialty. Lawmakers might write a law that interstate truck and car speeds should be safe, and then let local jurisdictions decide the basic speed limits, as well as speeds around corners, with slower speed limits for tighter turns, etc. That’s not written in the statue; that’s what law enforcers are supposed to determine.
Not all laws direct regulators to implement them; they can be self-effectuating. Lawmakers can direct implementation on a certain date and invite regulators to write accompanying guidance. But if the guidance comes after the implementation date, the statute remains in force.
Section 956, as approved by the Senate, came from the House, which approved the bill Dec. 11, 2009. Here, it was called Section 2004, and the language is largely the same.
SEC. 2004. ENHANCED COMPENSATION STRUCTURE REPORTING TO REDUCE PERVERSE INCENTIVES.
“Not later than 9 months after the date of enactment of this title, the appropriate Federal regulators jointly prescribe regulations that prohibit any incentive-based payment arrangement, or any feature of any such arrangement, that the regulators determine encourages inappropriate risks.” The regulators are the Board of Directors of the Federal Deposit Insurance Corporation; the Director of the Office of Thrift Supervision; the National Credit Union Administration Board; the Securities and Exchange Commission; and the Federal Housing Finance Agency. [The Office of Thrift Supervision was subsequently abolished.]
It is remarkable that of all the issues associated with the financial crash of 2008, anger at executive bonuses stirred some of the fiercest passion among average Americans, yet Congress did little to address this issue other than to accept an Obama Treasury Department draft. The only bill offered during the six-month period between when the Obama Treasury forwarded its draft to Congress and Congress approved the final version on July 21, 2010, came from Sen. Bill Nelson (D-Fla.). His bill restricts tax deductions for high pay, not a central issue in the crash.
But who in the Obama Treasury penned Section 956? Obama Treasury Secretary Timothy Geithner did give at least one speech calling for banker pay reform. But he was unlikely to draft legislation; that would be left to more junior staffers. Moreover, as subsequent histories by leaders at the time, including by Geithner himself, FDIC Chair Sheila Bair and other, Geithner focused on flooding banks with cash—foaming the runway. It seems unlikely he’d pen the 602 words that are Section 956.
Treasury staffer Aaron Klein, now senior fellow senior fellow in Brookings Economic Studies, says it wasn’t him, and he doesn’t know who it was. He speculated that Neal Wolin lead Treasury on that issue area. Wolin was the Deputy Secretary at Treasury (the No. 2 position) and chief operating officer. EMAIL OUTSTANDING TO WOLIN
Michael Barr, currently the vice chair for supervision of the Federal Reserve Board in Washington, and Obama’s assistant Treasury secretary for financial institutions under Obama said it was not him.
Amias Gerety, an aide to Treasury Secretary Timothy Geithner who marshalled the Volcker Rule study, and now works for the private equity firm QED, said he couldn’t remember who authored it. Gerety’s boss Mary Miller, title, has not returned an email.
Perhaps a detailee to Treasury from a banking agency such as the Federal Reserve? One of these was Mark Van Der Weide, who served the year 2009 as a Fed detailee to Treasury. He is now the general counsel of the Federal Reserve. No, it wasn’t him, he responded.
Nor was it Scott Alvarez, long-time general counsel of the Fed, and in this position at the time of the crash and drafting of Section 956. Alvarez also testified in September 2010 on executive compensation reform before the House Financial Services Committee, including guidance the Fed issued shortly after the crash, and implementation of DF 956.
Alvarez served as Fed general counsel under Chairs Ben Bernanke and Janet Yellen. His career at the Fed spanned 36 years. He was known to run a tight ship. In his email, Alvarez guessed, “My memory about DFA 956 is that it came from Barney Frank’s office. A person who might know about it is Andrew Miller. He was on Barney’s staff at the time and worked heavily on the House version. I’m not certain if he’s still there, but I last knew he was working in the legal department at PNC. “
Emails to PNC revealed Andrew Miller had since moved to Fannie Mae where, as of spring, 2023, he served as senior vice president and deputy general counsel. A query to the press office resulted in this email, from Jacqueline B Stein.
I spoke with Andy, and he let me know he did not work on those provisions in Title 9 of Dodd-Frank and would not have a helpful perspective to provide you.
We respectfully decline your interview request.
Thank you for reaching out to Fannie Mae!
Alvarez memory notwithstanding, it seems more likely that the language did come from a Treasury staffer. A document published in November by the Obama Treasury called New Foundations. THERE IS A JULY 2009 DOCUMENT ALSO. W SAME NAME.
This makes reference to reports that came from a September, 2009 summit of the 20 leading economies (G-20) held in Pittsburgh. The overall document of this group specifically mentions banker pay. This is the “Leaders Document” (and the US Leader at the time was President Obama) and covers pressing issues, from climate change to financial policy. The attention to banker pay reform is notable for its specificity; it is much more detailed than the language of Section 956.
“Reforming compensation practices to support financial stability: Excessive compensation in the financial sector has both reflected and encouraged excessive risk taking. Reforming compensation policies and practices is an essential part of our effort to increase financial stability. We fully endorse the implementation standards of the FSB [Financial Stability Board, composed of the world’s national central bankers] aimed at aligning compensation with long-term value creation, not excessive risk-taking, including by (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation to be deferred, tied to performance and subject to appropriate clawback and to be vested in the form of stock or stock-like instruments, as long as these create incentives aligned with long-term value creation and the time horizon of risk; (iii) ensuring that compensation for senior executives and other employees having a material impact on the firm’s risk exposure align with performance and risk; (iv) making firms’ compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently. Supervisors should have the responsibility to review firms’ compensation policies and structures with institutional and systemic risk in mind and, if necessary to offset additional risks, apply corrective measures, such as higher capital requirements, to those firms that fail to implement sound compensation policies and practices. Supervisors should have the ability to modify compensation structures in the case of firms that fail or require extraordinary public intervention. We call on firms to implement these sound compensation practices immediately. We task the FSB to monitor the implementation of FSB standards and propose additional measures as required by March 2010.”
In an off-the-record interview, a Federal Reserve economist who co-authored one of the supporting papers behind this general statement discussed a split between what he called Anglo-American economists and European continental economists. The continentals wanted specific banker pay limits. The Anglo-Americans pressed for general principles, not specific limits. He contended that specific limits might not apply to all banks, given their varying natures. Does this explain why DF 956 is general, calling only for avoidance of “inappropriate” compensation structures, and not deferral funds, or limits on stock options?
In another off-the-record interview, a congressional legislative counsel (they draft legislative text for members of Congress) speculated that DF 956 might have been written by a person such as herself; that person would not have been an expert in banking policy but following general direction by a Treasury staffer. Use of the term “inappropriate” is a sign that the Treasury staffer wants to avoid specificity, and give ultimate leeway to regulators who would draft such details.
The six regulators charged with implementing DF 956 did try twice: once in 2011, which was the statutory deadline; and again in 2016, after the 2011 effort drew loud scorn both from Wall Street and progressive groups. Both proposals required deferral of pay that would be forfeited upon failure of the bank or payment of misconduct fines. The 2011 draft, however, deferred the funds for a very short period. The 2016 deferral is stronger, but forfeiture is at the discretion of the bank’s board. Since bank boards are often captured by the CEO, and rarely dock CEO pay even in bad times, this conditional forfeiture feature drew opposition from progressive groups. Wall Street didn’t support the 2016 proposal either, as it considered the deferral and other features overly restrictive. The 2016 proposal was never adopted. Regulators who explain the delay often point to the problem of coordination between six agencies. Could that have been intentional by the staffers who wrote this section? Were they actually attempting to derail banker pay reform, not facilitate it? And again, why the vague language about “inappropriate” risk-taking instead of specific limits?
Yet who was that Treasury staffer? Or what staffer conceived DF 956 at least in principle? Or does it have no acknowledged parent because DF 956 isn’t something one wants to own?
Ideally, a reader of this will know and email me. firstname.lastname@example.org