The Feds Crank Up the Payback Pressure on Banks

As banks plan to announce billions in bonuses for their executives, the federal government is looking for ways to rein in those bonuses and collect some of that money to pay back taxpayers. Two government proposals introduced this week could begin to do both. One is carrot-and-stick approach from the Federal Deposit Insurance Corp. (FDIC), and the other is a new fee levied on banks from the U.S. Treasury Department.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%The FDIC's board agreed to seek public comment on a proposal to charge higher fees to banks that base compensation solely on short-term results, while rewarding banks with lower fees if they design compensation packages based on long-term results, such as stock that cannot be sold immediately. The FDIC collects fees from all banks and uses them to repay depositors in failed banks.

FDIC Chairman Sheila Bair believes a growing body of evidence shows that bonuses based on short-term performance played a role in fueling the financial crisis. She thinks the FDIC's new approach would reinforce guidance from the Federal Reserve, which has instructed banks to tie compensation to long-term performance.

Internal Dissension

The proposal passed the FDIC board by a vote of 3 to 2. Objections came from John Dugan, head of the Office of the Comptroller of the Currency, and John Bowman, acting director of the Office of Thrift Supervision, who believe the proposal was premature and possibly outside of the FDIC's authority. They wanted to wait to see if the Federal Reserve's guidance would be sufficient to change compensation practices.

Bair disagreed with their objections because she believes some banks want to reform pay packages but are afraid that doing so could give their competitors an advantage for recruiting employees. Her position is that this fee incentive could help banks justify the decision to implement reforms.

After seeking public comment, the FDIC board could adopt a final proposal later this year.

If Bonuses, Then Payback

In another attempt to seek repayment for the financial meltdown that Wall Street triggered in September 2008, President Obama will announce Thursday a new fee on the nation's biggest financial institutions. It will be collected over a number of years and be used to repay the government (helping to shrink the overall budget deficit) and the taxpayers for money used to bail out the financial industry.

Financial institutions have squawked that this will hurt the recovery and slow lending, but at the same time they're preparing to pay out billions in bonuses. If they can afford to dole out those billions, they can also afford to repay the taxpayers.

The fee could result in collecting as much as $120 billion worth of losses the U.S. Treasury now expects from the $700 billion Trouble Assets Relief Program (TARP). The fee would be part of the 2011 budget that President Obama will submit to Congress in February.

Threats to Relocate

Specific details about the fee haven't been released, but one key will be to design it so that banks can't simply pass the cost on to their customers, that is, taxpayers. The administration so far has said only that the fee wouldn't be a one-time levy but would last for years. One possibility is for a transaction-based fee.

The global impact of such a fee is another key factor. Britain's plan to rein in compensation packages has some banks ready to move out of London. While those threats may be no more than that, the U.S. will also have make sure banks can't easily move outside the country to avoid the fee. After all, the point is to raise revenue for the government, not lose it.
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