Thousands of bankers made millions of dollars causing the 2008 Wall Street crash, which cost millions of Americans their jobs, homes and savings. Then, in the aftermath, thousands of bankers made millions more scavenging the victims.
These sad facts are lost in a bill making its way through the House this month, authored by Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee. So here’s a brief refresher course:
- Countrywide loan brokers made oversized commissions by selling expensive mortgages to borrowers without adequate income.
- Goldman Sachs bankers profited by bundling bad mortgages into securities they sold to investors, and then profited again by placing bets those securities would falter.
- AIG traders paid millions to sell faulty insurance on bonds. When AIG couldn’t pay the claims on failed bonds and taxpayers bailed out the firm with $185 million, these same traders were paid millions more to clean up the mess.
- Hedge fund managers such as “foreclosure king” Steven Mnuchin, now the Treasury Secretary, who bottom-fished failed lenders and pocketed millions while evicting people from their homes.
Even the wages of failure were extraordinary. Lehman Brothers declared bankruptcy and Bear Stearns failed and was sold to JP Morgan. But the 10 senior executives of these two firms were paid a collective $1.4 billion in eight the years leading to the crash (2000-2008). That’s an average of $140 million each. Crashing the economy proved richly rewarding.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act contains a clutch of provisions generally aimed at addressing these inequities. To be sure, the provisions don’t go far enough.
But Chair Hensarling wants to eliminate nearly all of them. He’s promoting what he calls the Financial CHOICE Act. It goes before a committee vote and then possibly a full House vote in mid-May.
Buried in his 590-page deregulation frenzy are two pages that repeal 40 separate securities-related provisions of the Wall Street Reform Act. Among those on the chopping block:
- Section 956. This provision calls on regulators to prohibit pay structures that lead to “inappropriate” risk-taking. It is inappropriate for lenders to make mortgages to borrowers based on falsified income statements. It is inappropriate to profit by packaging them in securities and selling them to unwary investors. And it’s inappropriate for senior bankers to pocket millions overseeing this vicious cycle. This rule hasn’t been finalized, and the proposed inter-agency draft certainly fails to advantage the full force of what “inappropriate” should mean.
- Section 955: This provision simply calls for banks to disclose whether employees or members of the board of directors are permitted to engage in transactions to hedge or offset any decrease in the market value of equity securities granted to the employee or board member as compensation. Since incentive compensation is meant to incentivize, hedging defeats the purpose, and some firms already forbid it. Eliminating disclosure means firms could hide this practice from their shareholders.
- Section 954: This provisions requires firms to “claw” back compensation that was awarded based on results that later prove to be false. At Wells Fargo, for example, senior executives were paid dozens of millions in bonuses based on the creation of new accounts by their customers. Those account creation numbers proved illusory, as line staff were compelled by onerous quotas to fabricate accounts without the client’s knowledge. The Hensarling bill only applies to executives who had “control or authority for the financial reporting.
- Section 953b: This provision simply requires that firms disclose the CEO’s pay as a multiple of the median paid employee at the firm. It’s an efficient way to measure if one firm’s CEO pay is out of line with that of its peers.
If responsible committee members truly wanted to address the problems of compensation in the banking industry, from the financial crash to the Wells Fargo fraud, they would strengthen pay reforms, not weaken them. A sizeable portion of senior banker pay should be sequestered and used to pay fines in cases where misconduct results in a penalty. Currently, penalties are paid by shareholders. Where bonuses are paid based on false results, the pay should be recovered, with the names and amounts disclosed. Stock options should be banned; instead, bankers should be compensated in bonds. This change would motivate the banker to put safety ahead of the kind of excessive risk-taking need to drive up stock prices. (Ideally, the bonds would convert to worthless stock in the event of insolvency.)
Nearly every Democrat on the committee has labelled the Hensarling bill the “wrong choice act.” Sen. Elizabeth Warren (D-Mass), labelled it a massive “insult” to Americans, in her testimony before a special Democrat’s hearing of the House Financial Services Committee April 28. The measure sprawls well beyond banker pay issues and strips hundreds of provisions from the 2010 law. It eliminates investor protections from companies raising funds on capital markets. It layers on absurd analysis requirements for any new rule that would paralyze regulators who attempt to respond to new problems in the financial sector. There is much that is wrong and insulting in the Hensarling bill.
This avalanche of awful may explain why Hensarling sought a vote after originally scheduling only one public hearing. (The Democrat’s hearing followed an appeal to the chair signed by each member of this caucus.) Familiarity with this bill certainly breeds contempt.
Bankers caused the crash because they were paid to do it. Among the myriad other problems, this bill is an invitation to do it again.
This post was updated to correct biographical information about one of the legislators.