bank, banks, corporate, corporate governance, Dodd-Frank, Dodd–Frank Wall Street Reform and Consumer Protection Act, economy, Ethic, Executive pay, finance, government intervention, inventives, lobby, markets, moral, NSA, Occupy, Regulation, risk, risk management, risk taking, trouble asset relief program, Troubled Asset Relief Program, Wall Street
The Wall Street bonus culture – coupled with suspicions that the culture facilitated
excessive risk taking – led to an effective prohibition on cash bonuses for participants in the government’s Troubled Asset Relief Program (TARP) and more-sweeping regulation of executive compensation as part of the July 2010 Dodd-Frank Wall Street Reform Act. This chapter explores the banking bonus culture, its role in inducing risk-taking, and the appropriateness of the regulatory response. While I find little evidence that the pay structures provided incentives for risk-taking among toplevel banking executives, there is some evidence of value-destroying performancemeasurement problems for lower-level traders, brokers and loan officers. The regulatory reforms imposed in TARP and Dodd-Frank have largely focused on punishing perceived excesses in top-level executive pay, and have not served to reduce risk, improve pay or protect taxpayers. Overall, while incentives for bankers can clearly be improved through well-functioning corporate governance, further government intervention will likely be counterproductive.
In early 2009, with the United States still enmeshed in the financial crisis and reeling from the bailouts to the banking sector, Congress shifted its attention to the critical task of finding someone (or something) to blame. The most obvious culprit – or perhaps scapegoat –was the “Wall Street bonus culture,” the tradition in which traders, brokers, and executives receive most of their compensation not in base salaries but rather in bonuses paid at the end
of the fiscal year. Since this tradition rewards success but (allegedly) imposes no real penalties for failure, the Wall Street culture (allegedly) provides incentives for excessive risk taking of the sort that facilitated the crisis.
Public anger over banking bonuses surfaced in January 2009 amid reports that Wall
Street bankers were set to receive nearly $20 billion in bonuses for 2008 performance, and heightened with revelations that bailout-recipient Merrill Lynch paid nearly $4 billion in year-end bonuses just prior to completion of its acquisition by Bank of America.
Outrage further intensified following the March 2009 revelation that American International Group (AIG) was in the process of paying $168 million in “retention bonuses” to its executives. Revelations that bankers were receiving bonuses when their firms were obviously failing to download : http://www.russellsage.org/sites/all/files/Rethinking-Finance/Murphy.PayPoliticsCrisis%202-16-12.pdf
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