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Rampant Banker Misconduct in the Absence of Dodd-Frank’s Executive Pay Rule

WASHINGTON, D.C. – Financial regulators still need to implement an executive pay rule mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to curb inappropriate risk-taking by bankers, according to a new report from Public Citizen released today. Despite a 2011 deadline to implement such a rule and repeated instances of fraud, bribery, and abuse in the banking industry, the rule has yet to materialize.

“When bankers seek to maximize their compensation by any means, the devastation can be enormous, as we saw in the Great Depression and Great Recession,” said Bartlett Naylor, financial policy advocate for Public Citizen and author of the report. “Money-laundering that fuels drug lords and tyrants, bribery that undermines government development programs and public trust, and consumers paying fees on accounts they didn’t open all were the result of inappropriate behavior by bankers. The time is now for financial regulators must propose a strong rule implementing Section 956.”

The report documents numerous infamous instances of inappropriate risk-taking that a strong rule under Section 956 of Dodd-Frank might have constrained or prevented entirely:

  • JP Morgan lost $6 billion in flawed derivatives bets known as the “London Whale,” connected to plan to boost senior executive pay;
  • Goldman Sachs bribed Malaysian government officials to win lucrative bond underwriting deals, which also involved embezzlement of more than $1 billion;
  • Wells Fargo’s untenable quotas pressured agents to create fake accounts to boost senior executive pay linked to account growth metrics;
  • Supporters of a OneWest merger flooded regulators with suspect endorsement letters in a deal that promised a $24 million payout for the CEO; and
  • In 2022 alone, numerous cases link compensation to fraud and investor abuse by banks, including examples such as: a fake account scam at U.S. Bank; abuse in student loans by Navient; investor abuse by Allianz, Schwab, First Republic Bank, and Credit Suisse; and violations of rules for monitoring possible money laundering by USAA Federal Savings Bank and Wells Fargo.

Public Citizen believes an effective rule must ban stock options at Wall Street banks, ban executive hedging on bonus pay, and require that a significant portion of banker pay be deferred for 10 years as insurance against potential misconduct.