Federal Reserve silent on curbing bank bonuses
How soon we forget. Investment blunders by major international banks threatened the world's financial system with collapse and economic chaos just six years ago. Major investment banks have refashioned themselves to gain the financial protection of the Federal Reserve System.
Deemed “too big to fail,” these banks were spared bankruptcy through public funding. Despite some indications of potential fraud, senior managers were allowed to retain large bonuses and escaped unscathed from legal redress.
Today, these banks are bigger than before.
Readers may ask why the Federal Reserve appears to have done so little that bankers seem to be a protected species. Part of the reason is that most actions taken by the Fed to protect banks have remained covert, such as its Zero Interest Rate Policy, or ZIRP, which is killing Americans' interest-bearing savings.
The European Union, forced by public outcry to curb banksters' gambling in the wake of problems in Cyprus and elsewhere, has proposed a cap on bank bonuses. But the Fed has not followed suit.
The erosion of old bank size rules in certain states — such as single-branch or single-state limitations — allowed the formation of today's behemoth banks. Some banks became too big for partners to own and run, instead requiring huge public shareholder capital and managers.
Whereas bank partners risk their private wealth, managers invest the funds of customers and shareholders. They are motivated not by long-term relationships and reputation but by short-term risks intended to produce huge profits and bonuses. Should any disasters arise, the shareholders or taxpayers pay.
Major international banks, or so-called “gold banks,” form what former Fed Chairman Alan Greenspan referred to as his “Plunge Protection Team.” They comprise the largely unaudited Fed's outlets for manipulating the price of gold and equities. If critics' suspicions prove correct, the Fed's vital interest is the protection of these ever-bigger banks.
In the Cyprus scandal last year, it was revealed that banks wrote off loans for certain companies and politicians at the heart of the crisis. Meanwhile, the International Monetary Fund made depositors pay for the banks' failings by taxing their savings. The IMF suggests a similar international tax in the event of future banking disasters.
European Union regulators propose a bonus cap for bankers equal to — or, with shareholder approval, twice — their annual salary; that bonuses should be paid over extended periods and be subject to “take-back” when deals go bad. Arguing this will make them uncompetitive in retaining staff, London banks, including American branches, seem intent on hiding bonuses as “reviewable salary,” “role-based salary,” or “allowances.”
The British government, concerned about a Franco-German ploy to remove London as Europe's top financial seat, is resisting EU proposals. This gives the Fed temporary cover for its lack of action.
Americans might support the EU oversight proposals if they were not kept unaware of risks and depositors' liabilities that loom should Cyprus-like problems threaten international banks again.
John Browne, a former member of Britain's Parliament, is Trib Total Media's financial and economics columnist. Reach him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Pitt football notebook: Athletic department seeking fans’ input
- Steelers notebook: Linebackers on the spot against Saints offense
- Penguins notebook: Johnston calls Quinn ‘phenomenal’ coach, person
- Pirates star McCutchen marries in private ceremony
- PennDOT work to close lanes on Parkways
- Grand jury reaches decision in Ferguson shooting
- Liberty Bridge inspections to close lanes
- Stocks stake claim in record territory
- Pa. bear hunters off to good start
- Hockey loses pair of legendary figures in Quinn, Tikhonov
- NFL notebook: Chiefs safety Berry may have lymphoma