Bankers' bonuses

Fed should rein in compensation that promotes unacceptable risks

HOUSTON CHRONICLE

Sept. 23, 2009, 8:16PM

The days are
long past since most Americans viewed bankers as staid, starched-shirt
types preaching the virtues of thrift and a “penny saved is a penny
earned.” That hoary stereotype probably went out the teller window for
good about this time last year when the country's banking system
threatened to collapse. Only a massive infusion of taxpayer dollars
helped the system to avoid calamity.

A year later the
problem with banks still isn't fixed, and one of the root causes is the
way the bankers have continued to hand out bonuses since the bailout.
It's as if they never heard of it and think they got well on their own.

The
incentives for these performance-based jackpots for upper management
are problematic. Too often, they are still tied to short-term gains
that come at the expense of long-term stability and sustainability. As
we've seen, that strategy builds nothing but a house of cards that
taxpayers are left to rebuild.

Popular
and political support is growing for the Federal Reserve to step in and
change things, but without directly managing the bankers' actual
business. That is a fine line to walk, but one that must be attempted.

The
Fed is proposing a system to police banks' pay policies with the aim of
curbing excessive risk-taking. The central bank would review banks'
compensation policies to ensure that they do not encourage risk. It
would stop short of dictating levels of compensation directly, leaving
that to the bankers themselves.

This
approach seems both reasonable and necessary. In the best of all worlds
the banking industry would not require such supervision; but the
bankers have so far been unable to demonstrate the level of
responsibility to be permitted to continue on their own. The stories of
post-bailout greed do not need an elaborate retelling here. Or perhaps
they do: While the U.S. economy crumbled and the federal government
spent billions bailing out some of the country's high-profile financial
institutions, Wall Street bankers were awarding themselves nearly $20
billion in bonuses.

Suffice
to say, these decisions demonstrate a level of insensitivity that
borders on the shameless. The banking culture is clearly still sick,
and the root causes of the malaise must be addressed. This work should

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