Even Citigroup (C) Chief Executive Officer Vikram Pandit has gotten the message about bankers' pay. In response to an interview question about Andrew Hall, a star Citigroup commodities trader, Pandit said $100 million in annual compensation is excessive for a banker. That issue may soon become moot if the Fed gets its way.
He told the audience at New York's 92nd Street Y, which included some Citigroup employees, that compensation has become a political minefield for Citigroup. He noted that the company was in the process of restructuring Phibro LLC, the trading operation led by Hall, who received $98.9 million in 2008 and who could contractually make as much as $100 million this year. Citigroup did make the argument to Obama administration pay czar Kenneth Feinberg that Hall's contract is exempt from Feinberg's jurisdiction because it was signed prior to a deadline specified by Congress.
All this might be moot if the new Fed plan to inject regulators into compensation decisions is adopted by the central bank board. The planned changes, which do not have to be approved by Congress, could mean that for the first time, the Fed will be able to reject compensation packages it believes encourage bank employees, including chief executives, traders and loan officers, to take on too much risk.
The regulators won't set the pay of individuals, but will have the right to review, and if they deem necessary, amend a bank's salary and bonus policies to ensure they don't "create harmful incentives," according to a report in The Wall Street Journal on Friday.
The Journal reports that the final proposal is still a few weeks away from completion and revisions are still possible. When completed, the proposal would only require a vote by the Fed's board, but would not need to go to Congress for approval. The largest 25 banks would get the closest scrutiny. The Fed plans to compare the compensation packages of the banks to see if any practices stand out as "unusually dangerous to their firms."
In addition to reviewing pay packages, the proposal calls for a "clawback provision" to reclaim pay from staffers who take risks that hurt their firms. The Fed could also insist that pay be offered through restricted stock or other forms of long-term compensation that are designed not to reward short-term performance.
The Fed believes it already has the authority to take action through its existing supervisory powers, which include overseeing a bank's soundness. Even if those powers have been questioned by some in Congress, I doubt they would try to stop the Fed. I think Congress would prefer to see the problem to go away so they don't have to try to get a bill passed.
Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to the Federal Reserve.
Managing your Portfolio
Keeping your portfolio and financial life fit!View Course »