Washington's bureaucratic warriors are strapping on their armor to fight for control of how Wall Street pays its people. The Fed is letting it be known that it does not want the Treasury's special master for executive compensation -- a.k.a., the Comp Cop, Kenneth Feinberg, to have the last word. There's some good news buried in the Fed's proposal -- it wants banks to delay paying bonuses for a few years to see whether bankers' deals lose money.
Before getting into the details of the Fed's proposal, it's worth noting that banker pay is no side show -- it's the biggest thing out there when it comes to banks. As much as 70 percent of bank revenue goes to pay bankers. Bankers work 100 hour work weeks for the hope of having one good day a year -- when their bonuses are announced. A big reason the financial crisis happened is that bankers did whatever was necessary -- including closing big deals in the short-term regardless of future losses from those deals -- to secure ever-higher bonuses.
For years, I have been feeling like a broken record -- arguing since July 2007 and many times since -- that banker bonuses should go into escrow. If the deals that bankers originate end up making a profit for investors after a few years, the bankers get the money in escrow. If the deals lose money, the escrow accounts flow to the investors who've been harmed. I believe that this kind of incentive system would force bankers to originate better deals since their pay would be tied to both their deals' riskand return.