Bloomberg News

Obama Decries Big Bonuses at Bank Trading Desks as Risky

July 03, 2014

Obama Decries Trader Bonus System as Risky Even After Dodd-Frank

A trader works on the floor of the New York Stock. Photographer: Jin Lee/Bloomberg

President Barack Obama’s critique of trader bonuses at Wall Street banks as still risky to the economy drew objections from financial executives who said the compensation system already has been fixed.

In an interview aired today on American Public Media’s Marketplace radio program, Obama said bonuses encourage traders to “take big risks” that imperil the financial system’s stability. Cutting that risk remains an “unfinished piece of business” and his administration will be “looking at additional steps,” he said.

Even as White House press secretary Josh Earnest told reporters that the president wasn’t suggesting specific action, people in the financial community said Obama’s comments were off base.

“This idea that Wall Street is this sort of great evil is at best simplistic,” Marketfield Asset Management Chairman Michael Shaoul said today on Bloomberg Television. “I think Wall Street is an easy target.”

If Obama follows through it would add to pressure on banks that have already cut or reassigned scores of traders. Many traders have joined hedge funds ahead of a Dodd-Frank Act measure known as the Volcker Rule -- named after former Federal Reserve Chairman Paul A. Volcker -- that restricts the once-lucrative business of speculating for the accounts of the nation’s biggest lenders.

A separate regulation under the 2010 Dodd-Frank law would require delayed bonuses for some bank executives. A draft was released in 2011 but has since stalled without action at the Securities and Exchange Commission.

Stalled Regulation

Alan Johnson, founder and managing director of New York-based Johnson Associates Inc., who advises Wall Street banks on compensation, said in a phone interview that Obama’s comments were “just weird.”

“Trading is so far down from the peak, they’ve spent an endless amount of time and energy to reform trader pay -- to say that trader pay needs to be reformed is just bizarre,” he said.

The ability to make big risky bets has been dramatically reduced, he said, calling Obama’s comments “just political -- when in doubt, blame Wall Street.”

Though Obama’s comments on bonuses aired today, the interview was recorded a day before government statisticians reported the economy added 288,000 jobs last month and the unemployment rate dropped to 6.1 percent, the lowest since before the financial crisis peaked six years ago.

While U.S. corporate profits and stock indexes have soared to record highs, middle-class incomes haven’t yet made up the ground lost during the recession.

Public Disapproval

Ahead of congressional elections in November, public disapproval of Obama’s handling of the economy is running higher than on the eve of the 2010 midterm elections, when the president’s Democratic party was handed what he called a “shellacking” and lost control of the House.

Fifty-seven percent of Americans said they’re unhappy with Obama’s economic stewardship in a June 6-9 Bloomberg National Poll compared with 51 percent in October 2010. Almost two-thirds say the country is on the wrong track.

Wall Street employees took home an average bonus of $164,530 last year, the most since the 2008 financial crisis and the third highest on record, according to estimates released in March by New York state Comptroller Thomas DiNapoli.

While the collective bonus pool rose 15 percent to $26.7 billion in 2013, the increase was fueled by compensation deferred from prior years. Delaying payouts is meant to discourage employees from trying to reap quick payouts by taking risks that can hurt their firm in the future.

Alter Incentives

Obama said banks need to change “how they work internally” to alter incentives for traders.

“Right now, if you are in one of the big banks, the profit center is the trading desk, and you can generate a huge amount of bonuses by making some big bets,” Obama said in the interview. In the event of “a really bad bet,” he added, “you might end up leaving the shop, but in the meantime everybody else is left holding the bag.”

Obama said the Dodd-Frank financial regulatory law that his administration backed has reduced the risk by requiring banks to hold more capital as a cushion against a financial institution triggering a broader crisis. It also reduces the risk to taxpayers, he said.

Even so, he said, he has told his economic team that the administration should take steps “to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy.”

‘Real Economy’

Financial regulators already have the authority to carry out Obama’s message, said Marcus Stanley, policy director for Americans for Financial Reform. Dodd-Frank required banks and Wall Street broker-dealers to ban bonuses that encourage dangerous levels of speculation and risk-taking.

The 2011 proposal issued by the Treasury Department, Federal Reserve and other agencies would have required delayed bonus pay-outs for executive officers or leaders of major business lines. Separately, a bank’s board of directors would have to approve bonus structures for employees whose trading could expose an institution to hefty losses, the proposal said.

“It’s just a very weak rule,” Stanley said in a phone interview. “It didn’t go beyond what banks were doing, and in some cases, didn’t go beyond what banks were doing before the financial crisis.”

Regulators also can curb risk-taking as they enforce how banks respond to the Volcker Rule, Stanley said.

Bonus Restrictions

“If this is a signal about prioritizing these issues, they are all issues you can really move on without having to go through Congress,” he said.

For banks, broker-dealers and investment advisers with more than $50 billion in assets, the 2011 proposal said that at least half of incentive-based compensation must be deferred three years and be adjusted to reflect the company’s performance. The bonus restrictions would target executive officers and those who can expose the firm to “substantial” losses, such as traders with large positions.

A wider array of financial firms, those with at least $1 billion in assets, would have to steer clear of excessive bonuses and file annual reports explaining their compensation, according to the proposal.

For all the focus on Wall Street pay, compensation in other industries is often much higher.

The highest-paid U.S. chief executive last year, Cheniere Energy Inc. (LNG:US)’s Charif Souki, received $142 million, more than seven times what Goldman Sachs Group Inc. (GS:US) paid CEO Lloyd Blankfein, according to data compiled by Bloomberg. CBS Corp. (CBS:US)’s Leslie Moonves received $66.9 million last year, compared to the $14.4 million Morgan Stanley (MS:US) paid to CEO James Gorman, according to the companies’ summary compensation tables, which is an SEC-mandated disclosure that shows some awards in the year they’re granted rather than for the year they’re earned.

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net Maura Reynolds


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