Friday, September 18, 2009

Fed to Regulate Banker Pay? Madness

Under new regulation currently being designed,

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed's plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks' corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees -- from chief executives, to traders, to loan officers -- to take too much risk. Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.

This is madness. Setting aside the horrific precedent, the plan will fail massively for three reasons:

1. Determining which compensation plans encourage risk is hard; regulators will sometimes get it backwards.

2. Financial firms will create complicated compensation packages that innovate around the regulations.

3. If the regulations are truly onerous, financial firms will just re-locate outside the U.S.

The only way to prevent excessive risk-taking is to let financial firms fail when their investments blow up. No bailouts, no subsidies, ever.

14 comments:

Fady said...

was talking to a JP Morgan exec last week: Had the firm not paid back TARP money, a whole lotta of them were going to bolt -- they just weren't going to put up with that much government control. I imagine a similar phenomenon will take place here as well. Good luck with the system then...

Anonymous said...

Along the same lines this morning's headline said Biden: 'I Want Insurance Companies to Make Money'. Good lets go with that concept. If he can decide who makes money, he can decide who doesn't.

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