"U.S. to force Wall Street to defer half of bonuses," is the headline over a Reuters dispatch that begins, "U.S. regulators will propose on Monday that executives at the largest financial institutions have half of their bonuses deferred for at least three years as part of efforts to curb excessive risk taking, according to two people familiar with proposal. The proposal, to be unveiled at a Federal Deposit Insurance Corp board meeting, applies to top executives at financial companies with $50 billion or more in assets such as Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N)."
Ordinarily in a free economy the management, directors, or shareholders of a company are supposed to set pay, not the government. If deferring compensation is so great for risk management, some firms will gain by implementing it on their own rather than by needing to be forced to do so by the government. The justification that's been advanced to support the government's involvement in this case has been that these are "systemically important" firms that the government would have to step in to support if they got close to failing.
The Reuters dispatch says the Dodd-Frank financial "reform" law required a compensation rule "to be worked on jointly by banking regulators as well as the Securities and Exchange Commission and the Federal Housing Finance Agency." If the politicians had put this exact provision into the law, at least the banks could have had a better chance of fighting it, and the politicians would have to explain to the public why the government should take such a big role in setting pay practices. By passing the responsibility on to unelected bureaucrats at the FDIC and the SEC, the congressmen dodge responsibility.
Markets being markets, if the rule is implemented, mechanisms will doubtless arise to allow bankers to take advantage of their deferred compensation in advance. One could imagine a market in banker-bonus futures. After all, the Goldman Sachs partners have already figured out how to hedge their stock-based compensation.
Still, it's easy to envision talent fleeing from the too-big-to-fail banks to other financial institutions where bonuses are paid at year-end rather than more than three years later. Thus the rule purportedly intended to adjust incentives and make it less likely for the big banks to fail could have the perverse unintended consequence of robbing the big banks of talent, and making it more likely for them to fail.
The direction this is headed is clear: "banks must be made smaller and less profitable," advises a New York Times editorial. Exactly how much less profitable the Times doesn't say. Maybe the Times would like the banks to make less profit than the New York Times Company does? In the midst of the financial crisis, the problem was that the banks were losing money; now the editorialists want to force them to be "less profitable." Maybe that's how the bonus system could be restructured: the banker gets the full bonus at the end of three years if he succeeds in meeting the New York Times-set goal of becoming "less profitable," while the bank's shareholders get — what, exactly?
Anyway, there's plenty of blame to go around for all this — Dodd, Frank, President Obama who signed it, the New York Times editorial writers. But one shouldn't forget Henry Paulson or President Bush, either. There are plenty of people out there applauding TARP for supposedly saving the financial system and for the fact that it cost less than originally thought. But once Mr. Paulson and Mr. Bush started down the road of putting government money into "saving" banks it was only a matter of time before the government would be setting compensation policy long after the banks repaid whatever they got from TARP, with the justification being the need to prevent another "rescue."
One irony is that the longer the bankers have to defer their compensation, they more they become like the politicians themselves, who make most of their money in lobbying and speaking fees and book deals after they leave office. If the bankers want to strike back, they might propose imposing a three-year rule — or better yet, a 10 year rule — on the politicians and the bureaucrats, preventing the politicians from getting the money from lobbying their former colleagues or cashing out on their government connections with speeches or books until years afterward, by which time the connections will be less useful and the public will have lost interest.