May 27, 2011
Elizabeth Murphy
100 F Street, NE
Washington, DC 20549
Dear Murphy,
America paid a terrible economic price because of irresponsible risk-taking by Wall Street executives. Those executives took those risks because they knew that they could walk away with billions of dollars in bonuses and stock options and never pay for the long-term consequences of their actions. We need tough rules so that Wall Street pay packages don't encourage short-term risk taking.
Your rules should require at least a five year deferral period for executive bonuses at big banks, ban executive hedging of their pay packages, and require specific details from banks on precisely how they ensure that executives will share in the long-run risks created by their decisions. It should apply to the full range of important financial institutions, and draw in all the key executives at those companies.
Once this rule is passed, only you will know the details of its enforcement. But it's important for the public to know the progress you are making on this vital issue. You should report back to the public annually with a detailed report on progress in creating accountability for Wall Street pay.
This lack of accountability in executive compensation created a Wall Street culture hooked on short-term risk. There's no doubt this was a key contributor to the financial crisis. As the Financial Crisis Inquiry Commission concluded:
"Compensation systems...too often rewarded the quick deal, the short-term gain without proper consideration of long-term consequences.
Often, those systems encouraged the big bet--where the payoff on the upside could be huge and the downside limited."
Wall Street insider Barry Ritholtz put it this way:
"In recent years, there was no legal liability for extreme recklessness. Take a healthy company, roll the dice and if it comes up snake eyes, all you lose are your unvested stock options. Most management does not have significant capital at risk. The cost for pushing a healthy firm into insolvency by excessive risk-taking is some snickering at the golf course. In terms of lost monies, it is minimal."
In the Dodd-Frank Wall Street Reform Act, Congress empowered regulators to address this outrageous situation. The law allows regulators to prohibit big banks from paying their executives in ways that encourage short-term risk taking with no long-term accountability. Ideally, they would use this authority to ensure that all the important executives at big financial institutions were fully exposed the long-term risks their firm was taking just as used to be true in past years when most Wall Street firms were partnerships and partners were personally liable for all gains and losses of the firm.
Regulators have taken the first steps to implement their new authority.
Their rule would require the largest banks to defer at least half of top executives' pay over a three year period. It would also increase regulatory oversight on excessive short-term pay that encourages risk-taking. That's a start but it's not tough enough yet. Here are some steps that would improve the rule:
1) A longer deferral period and/or more pay deferred. The rule allows banks to pay out the deferred bonuses in equal shares each year over the deferral period. This means that only a small share of executives'
pay would be at risk for the full three-year period. That's not enough.
The rule should require at least a five-year deferral period, or else more than 50 percent of pay to be deferred.
2) Require big banks to prohibit executives from "hedging" their compensation making side deals to get most of their money today and get around the deferral rules. Research shows that executives who do this are generally betting on future losses for their own company. A well run bank should not allow this.
3) Don't allow Wall Street to get away with narrative generalities about how they've reduced incentives for risk taking. Require specific and detailed reporting by banks on exactly how they ensure their executives' salaries are on the line if the company performs badly in the future.
4) Require the regulators to report back to the American public with details on the progress they are making in bringing long-term accountability to Wall Street pay practices.
Referencing Docket No.'s:
OTS: RIN 155-AC49
OCC: RIN 1557-AD39
Fed: RIN 7100-AD69
SEC: RIN 3235-AL06
FHFA: RIN 2590-AA42
FDIC: RIN 3064-AD56
Sincerely,
Ms. nan stevenson