Bair offers her own solution on bank compensation

By Edward Harrison of Credit Writedowns. Following up on Yves’ earlier piece on the Obama Administration’s banker windfall compensation tax scheme, I want to talk about a competing plan by Sheila Bair. While the first plan seems designed for political purposes in an election year, this plan is geared more toward the longer-term and systemic issues.

FDIC Chairperson Sheila Bair has released her own proposal to compete with a recently floated proposal for a tax on bank compensation.  Her proposal calls for linking compensation with FDIC insurance levies as a means of aligning incentives in the banking industry going forward. In contrast, the competing initiative calls for a one-off ‘windfall’ tax as a means of recouping bonus money due to be paid out by large financial institutions.

In announcing her competing plan, Bair said:

A broad consensus of academic studies agrees that poorly designed compensation structures can misalign incentives and induce risk taking. I share those concerns. The recent crisis has shown that compensation practices that encourage excessive risk can create significant losses in the financial system and the deposit insurance fund.

What I like about Bair’s proposal is that it is designed both as a longer-term solution and meant to align compensation with the larger systemic risks, which Bair explicitly mentions in the quote above.  On the other hand, I see the windfall tax proposal as a gimmick designed to harness the public’s outrage on a serious issue and misdirect it toward a one-off political ploy. Windfall taxes are not going to change systemic issues on risk, compensation and moral hazard, whereas the insurance levy does move in that direction.

The public is right to be angry about excessive compensation in financial services. The real issue in compensation has to do with individuals being compensated in the present for riskier bets which appear to accrue higher payoffs in the near-term but have disastrous consequences longer-term. Imposing a one-off tax does nothing to eliminate this problem. Tying compensation and risk together does.

What angers me personally is that this banker windfall tax appears to be a naked ploy to quell voter anger. The tax offers superficially satisfying populist solutions which fail to address any of the more systemic issues that led to the financial crisis. After the one-off tax, it’s back to business as usual on Wall Street. This seems to be a solution designed to win votes and nothing more. Let’s hope Bair wins the day in the Obama Administration’s internal politics.


FDIC Board Seeks Comment on Incorporating Employee Compensation Structures Into the Risk Assessment System – FDIC: Press Releases – PR-5-2010 1/12/2010

Also see FDIC’s Bair Blasts Other Regulators for Reluctance on Banker Pay Plan from the Wall Street Journal.

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This entry was posted in Banking industry, CEO compensation, Guest Post, Regulations and regulators, Risk and risk management on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. alex

    Edward Harrison: “I see the windfall tax proposal as a gimmick designed to harness the public’s outrage on a serious issue and misdirect it toward a one-off political ploy. Windfall taxes are not going to change systemic issues on risk”

    I couldn’t agree more – I’m actually glad we don’t have something like the UK’s 50% this-year-only bonus tax, as it would deflect anger from more important issues.

    I am skeptical though of whether any compensation scheme would be enough to fix the problem. There will always be gamblers, both in the executive suite and amongst stock, bond and house purchasers. Historically financial bubbles happen regardless of the incentive structure. Ultimately we need plain old-fashioned regulation. You’re not allowed to light fires in the gasoline dump, even if you agree to stick around and get toasted.

  2. Doc Holiday


    I have a wild hare, but it does amaze me that many blogs like Naked Capitalism and Calculated Risk, along with many other fine places like Zero Hedge (the list goes on and on) are often run by drunks, and dopers that sit around in bunny slippers, often half if not fully undressed, sipping glasses of wine, drinking coffee and chain smoking — while they tap out this pulsing written stuff that ends up on your screens for F’ing FREE.

    Folks, I’m in no way affiliated with any of these fools, but it does strike me tonight that it “probably” take money to run this type of dream business — where you get to be in a near coma state and just make shit up and then see if people believe it — after all, newspapers all around the world have been doing this for at least a century, and no one caught on … until today. It’s time to F’ing pay the piper! I’d like to be the first to contribute cash to many of these fine people, but I’m about as broke as a bum can be — but many of you that can still afford normal stuff, might want to think about the amount of time that goes into the work that all these people do and consider that even a donation of $5.00 is about the price of a triple tall, double whipped mocha (which just gets you fat).

    Take it from me, a blogging bum, I really appreciate all that I read here for free; this is a great resource, which helps educate us in a time of great chaos! We need to support our blogger friends!

    Amen and out…..

    Disclaimer and disclosure: I feel guilty!

  3. Doc Holiday

    I guess one thing that does interest me still, is the potential power of the press and the possibility that bloggers may help influence future policy — I realize that’s a long—stretch, but the hope that billions of bloggers united in an effort is a great concept — and we can’t unite unless we have great blogs like this!!

    Also see: Obama Plans to Raise $120 Billion From Banking Fees (Update4) – BusinessWeek
    Political Measure’

    “Clearly this is designed as a political measure,” said Roberton Williams, an economist for the Tax Policy Center, a Washington-based research group run jointly by the Urban Institute and the Brookings Institution. “How much you want to punish and how you go about it is so wide open.”

    1. kievite


      “I guess one thing that does interest me still, is the potential power of the press and the possibility that bloggers may help influence future policy”

      Individuals like Yves are important, but they are important in a very limited way — only as crystallizing force for new political parties. In a modern society voices of discontent does not matter much unless they are politically organized.

      So far the result is negative — other the teabaggers, I do not see any “proto-parties” gaining strength. This is just widespread, diffused amorphous discontent that can be channeled in unpredictable ways, but so far it clearly plays into the hands of Republican Party. Dems will lose some seats this year.

      Historically, road to hell was always paved with good intentions.

  4. David

    What’s so wrong with a one-off bonus tax? And next year, pass another one. And another …

    Judging by the amount of braying coming out of the London financial community, the 50% bonus tax was pretty effective! :)

    1. alex

      In the olde days the aristocracy had the pleasure of being beheaded, while the common folk would hang by the neck until dead. The grand honor of being drawn and quartered though was reserved for high treason.

      50% bonus tax? No wonder Merrie Olde England is not as merrie as it used to be.

  5. surferdude

    would it not be fair for the fdic to apply some pay for performance to its own executives and senior managers before it applies them to the banking industry? the fdic missed the greatest banking crisis since the big D and its insurance fund is insolvent. specifically, over the past 18 months, the fdic’s atlanta region has seen 53 bank failures that have cost the insurance fund $16.4 billion. yet, their atlanta regional director that did nothing while bank balance sheet’s grew to the gills with real estate loans recently retired with a full package. how about some clawback based on that performance? to lessen regulatory capture and malfeasance, the fdic should apply some performance measures to its own executives and senior manager pay and retirement packages. bair needs to get her own house in order before placing mandates on the industry.

  6. Hugh

    The post does not say what precisely the link would be between the bonuses and the insurance levies. Obama won’t go for this because the money would go to the FDIC and not the budget, which, aside from quieting some obstreperous rubes, is the real object of the exercise.

    Not that it is going to happen but as I said in an earlier thread I would like to see a 90% marginal rate for any income of any kind in excess of $1 million. For estates I would increase the amount to $5 million and tax the remainder at the 90% rate. I would ban most tax shelters and transfers to or creation of foundations.

    We have seen how wealth has been transferred out of the middle class for the last 30 years. It isn’t exactly rocket science to reverse those flows.

  7. attempter

    This sounds better than Obama’s obvious ploy (BTW I was surprised to see Taibbi being literally the one person I saw who was taking the Obama tax seriously), but it’s still a gimmick meant to evade resopnsibility for real structural reform.

    In the case of rational, equitable taxation and breaking up the wealth concentration which is the root of all our evils, the real reforms needed are the restoration of pre-Reagan rates, and to treat parasitic investment income as income and not as some privileged realm beyond it.

  8. Jack Parsons

    One root cause is the practice of paying people based on booked contracts, rather than cashflow. I see nothing wrong with being paid when the security gets paid off – you issues a thirty-year bond, you get paid a pittance for 30 years.

  9. Doc Holiday

    So much for the Telethon, but it is my hope that bloggers will think about taking the time to help support people like Yves that do so much work for so little!!!

    Now on to my bitching from CR tonight related to Hottie Dixie the Teenage Lawyer:

    This is just one of the top star investigators for the dog and pony show in the morning — AKA the independent investigatory panel led by former California State Treasurer Phil Angelides, which will weave back and fourth like a heroin addict at a meth clinic (hopes for clarity and at least just a wee-bit of medical marijuana). I don’t mean to be too unfair to these idiots that pretend to investigate the reasons for the global systemic collapse (caused by wall street derivative mis-management, fraud, collusion, corruption and other shit like that) but the premise of Ms. Teenage America (with 5 years experience) being placed on this commission/panel/circus to investigate derivatives/subprime/TARP/Blackholes and Multi-Trillion Dollar shit that is beyond supercomputers is F’ing absurd — and an insult to every American (living and dead)!

    WTF is going on? People need to complain about this on-going charade, and where, you ask might they complain or to who? That is a fair question …. if it were me (it isn’t) I would start looking for businesses to boycott, I would watch this circus and look for people to not re-elect, I would not buy newspapers that report this bullshit, I would shut off TV’s and start buying generic no-name groceries and start sending letters to elected officials and corporations and tell them to all fuck off and that your not gonna take this shit anymore — including the shit from the President of The United States — who is watching his ratings tank; tell him what you think about wall street corruption!

    Dislosure: The author really doesn’t care anymore …

  10. Doc Holiday

    Ah crap, I’m sorry, I didn’t intend to upset any young lawyers or kids in high school that wanna become lawyers, yah know (shit) If I was like 23, I’d probably wanna see someone my own age at a big investigation, versus seeing some old fat clown like Franks or other octogenarians that call themselves elected. Maybe the idea of a fresh young face is hopeful like spring and maybe the innocence of a single deaf and blind lamb like Dixie — tossed into a den of wolves, provides some simple blackhole-like metaphor, or at least the imagery that if Dixie crosses the Alpha leader and screws around withe meat, she’ll become dinner. Thus, Dixie as a trophy head will be as useful as the scarecrow’s brain, but to young folks that are watching the circus, Dixie may end up as the heroine, because she looks hot — typifing the no-nonsense, no-brains, no-holds barred moxie that this new world desires. If you look good and have the right connections you can get to the top and not worry about accountability. Accountability is something that will not be addressed with this investigative body and Dixie and everyone inside and outside the committee room — from the janitor to the President of the United States of America, will not give a shit about accountability — but people involved in this circus will be held accountable in historical accounts that will portray this as a period when American liberty was diminished by perjury, treason and fascism (was that sentence too long).

  11. Doc Holiday

    And another thing, What if ….

    What if you and your family are in a jet traveling from London to New York and you hear that they are people on the plane that have caused and contributed to the destruction of trillions of dollars — would you feel safe or threatened? Would you hope that Homeland security, the FBI, DOJ or some entity or authority from America would protect you? What if American authority made sure these people travelled First Class and provided them with limos, and allowed them to continue destroying money, while providing them with tax breaks, loopholes, and of course unlimited taxpayer dollars to ensure that this class of people can live in the finest homes and have the finest goods and services? Instead of treating this class of people as the financial terrorists that they are, the terrorists who do threaten your family security, your country and your future, these people from Goldman, Citi, Morgan, Lehman, Wells, AIG, GM, etc. are given million dollar bonuses and offered protection befitting the likes of mobster goons and gangsters like Al Capone.

    I’m sure Dixie is well read with many Nancy Drew stories, but maybe this is more appropriate for her new exciting job as a very young and hot investigative newbie:

    Between 1950 and 1951, the Kefauver Committee, officially the Senate Special Committee to Investigate Crime in Interstate Commerce, held all of America’s attention. It was the first committee made up of senators from around the country organized to not only gain a better understanding of how to fight organized crime, but also to expose organized crime for the conglomerate empire that it was (is).

    I wonder if Dixie will be going back to Vegas to report in?

  12. Holiday ghost-bot

    This had to be added, sorry:

    As for the Syndicate, they had lost valuable members of their empire after the hearings due to either death or deportation. Willie Moretti, who had supplied considerable comic relief during the hearings, was executed as a result of his candid testimony during the hearings in fear that he was becoming mentally unstable and would potentially reveal secrets of the Syndicate. Joe Adonis agreed to be deported to Italy to avoid prison and Frank Costello’s power in the underworld was so damaged that he would later step down from boss of his family to avoid further attempts on his life by Vito Genovese.
    Kefauver became a national hero for exhibiting not only his adept questioning skills of crime figures, but for his low key approach to dealing with them. He was called “Lincolnesque” for the quality of his words and seen as an “everyman” struggling against the corruption surrounding him.

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