Last Call for Banker Abusers -- Take Away Their Keys

The Wall Street Journal has reported that regulators are taking some of the bubbly out of bankers' bonuses. This will surely spark some outrage about meddling in private companies' affairs, not to mention executives' paychecks. Still, let's take a deep breath, count to 10, and place the blame squarely where it belongs: on the managements of financial companies and their insatiable desire to get drunk on power, pad their paychecks, and play a terrifying game of chicken on public thoroughfares.

Many investors see no reason to curtail CEO pay, even if it is outrageous, frequently a waste of shareholder money, and hardly a general indicator of exceptional business performance. What gets lost in the debate is that our marketplace really needs long-term, reasonable participants, and for too long, we've seen far more drunken partiers than sober participants.

Short-term incentives set up terrible temptations, and these are dangerous for all of us -- and they make an almost impossible case for the laissez-faire freedom many Americans crave.

Blame the abusers. First, blame the bankers.

Bankers taking their lumps
The Journal reported that some major financial companies are capping top executives' bonuses due to the pressure. Regulatory filings show that PNC Financial ServicesCapital One Financial, and Discover Financial Services have put limits on the maximum executives can pocket if they exceed performance targets.

These companies follow those mentioned in an imminent study by Compensation Advisory Partners, which reveals that BB&T, KeyCorpUS Bancorp, and SunTrust had already reduced their maximum performance-linked bonuses.

This doesn't all result from the goodness of these corporate citizens' hearts, though. Rumor has it that the Federal Reserve has made some phone calls to some financial companies, and some even mentioned the Fed's influence over the pay schemes in their regulatory filings.

Granted, the Federal Reserve technically isn't a government entity, but it's no secret that it's intimately involved with the government and has great power over the U.S. economy; some say way too much. Yes, "It's complicated," as some say in social media. Maybe the influence the Fed has been utilizing sounds just short of a government overreach, but there are reasons the entity would pressure the banks under current circumstances.

Remembering the financial crisis
The too-big-to-fail banks' managements proved that they couldn't be trusted during the financial crisis. Some of us truly wished they would be allowed to fail and take the true free-market medicine (I was one of them), but arguments that the economic system would fall like a series of dominoes made that a bit of a scary stance to take.

Granted, it would have felt good to see wrongdoers get what they truly deserved. However, if we were all destined to go Mad Max in the aftermath, it probably wouldn't have been worth it over the long haul.

Despite it all, there have been ample signs that big financial companies have learned little about risk, much less humility. AIG's pro-bonus antics post-bailout pretty much let the cat out of the bag that these are not free-market heroes; they are opportunists, plain and simple.

JPMorgan Chase's Jamie Dimon recently had a fall from grace after the London Whale debacle, with its billions in trading losses, which implied Dimon had less of a handle on risk than investors would have hoped for. The board cut his 2012 pay by half. While the pay cut is a good move, the fact that the scandal even happened was hardly heartening.

In March, Morgan Stanley's board cut CEO James Gorman's 2012 pay by 30%, making him low man on the totem pole when it comes to banker pay. Then again, the Journal's report states that Morgan Stanley also didn't change its overall policies on compensation, and in fact increased its maximum pay levels after having cut them several years ago. However, the company's policy is that if shareholders take a loss, Morgan Stanley's CEO pay can't increase.

The deterioration of economic freedom
There's a fine line to walk in lining up management incentives with shareholder value, and of course the reasoning behind padding many executive's paychecks is to align these interests by giving top management stock and options on top of massive salary, bonuses, and perks.

Theoretically, the spirit of that makes sense, but in reality, it's only logical if the shares are restricted, only to be sold after a very long period of time. Otherwise, the only "investors" managements are aligned with are traders, not long-term shareholders at all. And really, the long-term shareholders are the ones who really matter. They're the ones pushing for strong management teams that don't play Russian roulette with business health, much less economic well-being.

Meanwhile, we already know the short-term view has exposed us to systemic risk in the past. The incentives to take crazy risks to keep the party going are very difficult for short-term opportunists to resist.

Regulators would have far less traction in even dipping a toe into intervention if corporate leaders hadn't abused the system. And of course, the crisis and subsequent bailouts pretty much gave government the very real incentive to want system safeguards, not to mention wanting to calm people's fears. After all, many of us have 401(k) plans and, of course, do use banks in many forms in order to conduct our daily business.

The Dodd-Frank Act was obviously a direct result of all the dirty pool.

It's an easy knee-jerk reaction to draw it all in black-and-white and claim that big paychecks and crazy risks work out because they seem to work right now. It's not true, though. Those who believe taking on crazy risks makes them brilliant and that they deserve huge paychecks regardless of actual performance -- which, as we all have figured out, often doesn't come to pass in the long term -- are not defenders of economic freedom. They're destroying it.

Many investors are scared about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it stands out as The Only Big Bank Built to Last. You can uncover the top pick that Warren Buffett loves in The Motley Fool's report. It's free, so click here to access it now.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2013, at 3:00 PM, WileyCyote wrote:

    I believe that it was Thomas Jefferson who said: "Bankers are more of a threat than standing armies"

    Nothing has changed!

    If you harkin back to the Senate hearings held awhile back you might remember the words of that very trustworthy Mr.Blankfein, Goldmsn Sachs CEO. "We were only doing God's work".

    Keep on Truckin"

  • Report this Comment On April 29, 2013, at 9:40 AM, TMFLomax wrote:

    Thanks WileyCyote... good quotes! (yes indeed, let's not forget the "God's work" quote either!)

    Best,

    Alyce

  • Report this Comment On April 29, 2013, at 10:44 PM, TerryHogan wrote:

    Yes! Let's be outraged! Let's get rid of all the bankers! Then all the lawyers! Then all the politicians! Maybe plumbers too, because they charge too much! And what about oil company executives, aren't they behind the high oil prices?! And auto executives, didn't they take a bailout too?! What about mechanics, they always overcharge! And how come the finance writers didn't warn us of the financial crisis!

    I think we're getting a little carried away with the whole evil-banker thing. There should have been a cartoon of an obese feline smoking a cigar accompanying this article.

    Of course there are some bad bankers, there are hundreds of thousands of bankers, some are bound to be bad. Just like there are bad teachers, tailors, judges, janitors, police and politicians.

    The government should not be in the business of restricting wages in an open marketplace for talent.

    If you really wanted to save the average American money, you'd have them restrict athlete's pay, and actors' pay, or have them paid only for wins and box-office success, then we could have cheaper movie tickets and cheaper tickets to sporting events. (And don't tell me that sports clubs and film productions don't take government handouts)

    I think either cause is non-sensical.

    A better place to push for change is to have more people actually vote their shares, and have mutual funds and pensions take a more active role in corporate governance instead of rubber-stamping every proxy with a yes to management recommendations.

  • Report this Comment On April 29, 2013, at 11:22 PM, FelixCaliferous wrote:

    Hey, whats with the "obese feline smoking a cigar"?!?

    Some of us may be a fat cats but only a few of us smoke.

    No. We burn through taxpayer money. It's more healthy that way.

  • Report this Comment On April 30, 2013, at 9:09 AM, BMFPitt wrote:

    Institute the death penalty for asking Congress for a bailout. That probably wouldn't stand up in court, but who is going to be the guy who gets standing to find out?

  • Report this Comment On April 30, 2013, at 11:03 PM, gskinner75006 wrote:

    Do we get to use torches and pitchforks on this witch hunt? You should be careful though, you could put someones eye out with one of those things. p.s. Looks like one should start with the "Motley Fool" as it appears it is in bed with the banks and the notorious AIG.

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