In a move presumptively meant to curb the risky bets that have made major financial institutions infamous since the recession, the Federal Deposit Insurance Corp. is proposing enforcing financial institutions to not give executives half of their expected bonuses for the next three or more years. The draft rule will prohibit any bonus plan that encourages risk, making financial firms review the results of trades as well as other business decisions tied to employees’ bonuses over the deferral period. If losses ensue, the firms would then have to or decrease or eliminate the delayed compensation.
After the second-biggest financial downfall of the 20th century, the FDIC is surely looking to curb any future major financial mistakes. In an effort to make banks more accountable for risks on asset-backed securities, the FDIC forced banks to hold no less than 5 percent of securities on their books. The rule made banks purchase their own share of securities from January 2011. It also makes banks screen any new prospective borrowers and allow future loans to be properly handled. Before the rule, loans were transferred from investor to investor, with no one assuming responsibility for the defaulting loans until it was too late. They’re also looking to have the U.S. benefit from government intervention as well. Take the government’s actions with Citigroup: the U.S. netted $12.3 billion from the sale of 465.1 million warrants to purchase common shares of Citigroup. The moves have been proven to be positive for the banking industry, if for no other reason than them being positive pr moves. Nothing can burden any major business more than harsh public sentiment that could lead to customers turning to competition in droves.
Any attempt to control financial firms’ bonuses is a good thing. While about 10 percent of the country sits on unemployment, there are many financial executives still putting away millions of dollars in bonuses. When hundreds of people lose their jobs and then see their old bosses netting a more than six-figure bonuses, it’s time for a change. What could be a potential danger is their little-known financial know-how. Are there enough regulations to stop financial bigwigs from profiting on little-known loopholes? Is it enough to safely assume they’ll simply do as they’re told? Everything ultimately seems to be an attempt to curb unnecessarily huge spending, and curb unnecessary financial risk. And let’s be honest: of course these people don’t need these bonuses. The money could be spent attempting to dwindle down any remaining debt, or perhaps on company growth (aka more jobs). The question is: would any of these things happen? And would we even know about it if they did? All we could do is hope for the best, pay attention to the news, and react with our wallets when we have to.
Jeffrey Sparshott, “FDIC Proposes Rule On Incentive-Based Compensation,” WSJ.com
Tom Barkely, “TARP Profit on Citigroup: $12.3 Billion,” WSJ.com
Marcy Gordon, “New FDIC Rules require banks to share some risk,” NBC-2.com