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.