NorthWesternFinancialReview.com Blog

I have read several summaries of the Dodd-Frank Act, but this is the first I’ve heard about a rule requiring companies to publish their CEO’s salary in relation to the mean salary atthe company. I am trying to figure our the merit of this requirement. Clearly, the author of this rule wants some kind of compensation reform — either lower wages for CEOs or higher wages for staff.

Let’s be clear that this kind of information is already available. Many newspapers and other publications publish the compensation of big company leadership. And there are many services, including the U.S. Census Bureau, that publish mean income, by household and/or individual. Looking at the two sets of data, we all have a pretty good idea of what’s going on in this country. There already are a lot of people outraged by the disparity between top earners and staff.

The Dodd-Frank Act provision will surely exacerbate the outrage. If such disparity is a legitimate Congressional concern, I would be much more impressed by actual measures to address it than mere efforts to incite hostility over it.

There is a lot of anger in this country now over a lot of issues; I am not comforted by the idea of pouring gasoline on this fire at this time. Congress needs to focus on taking real action; it needs to do much more than simply whip up sentiment. But with our polarized Congress and political scene, this may be the best they can do.

U.S. Rep. Erik Paulsen (R-Minn), who sits on the House Banking Committee, addressed bankers gathered for the ICBM convention on August 7. His short video message addressed the Dodd-Frank Act. He said:

While most of us can agree that some amount of reform was definitely needed, I don’t think anyone in this room was comforted by the bill’s final passage or by the fact that the legislation’s primary author wasn’t even sure that his bill will be able to prevent another economic crisis. Instead, as pointed out in a sobering opinion piece in the June 29 Wall Street Journal, the Dodd-Frank Bill, with its tangle of new regulations and as-yet unwritten financial rules, seriously threaten community banking by punishing the people and institutions like you who played no role in the crisis.

What is also important about this missed opportunity is that the financial reform bill fails to address many of the issues that caused the crisis in the first place. Instead, it paints everyone with a broad brush and gives more power to the regulators who missed the early warning signs and failed to do their jobs.

It also completely ignores reforming and restructuring government sponsored enterprises Fannie Mae and Freddie Mac, which taxpayers have already spent more than $100 billion bailing out and are on the hook for billions more.

What may be most troubling for many of you is that most of you will now be affected in some way in how you run your business … small community banks are being made subject to rules set by a new credit czar and the newly created Consumer Financial Protection Bureau which will have broad authority to set sales practices, limit credit products, and mandate compensation growth. This credit czar has been given broad authority to determine whether a consumer financial product is unfair, and as the legislation is written, will have nearly complete authority to review consumer products and ration credit. In the end this will raise the cost of credit to consumers and small businesses while also imposing a hefty regulatory burden on your banks.

You know for every page of this 2,300-page bill, you will see about 10 pages of new rules and regulations. This enormous new compliance burden will expose small community banks to lengthy mandates and more burdensome regulations. In my opinion, instead of creating new bureaucracies and limiting consumer choice strangling small banks and small business with red tape, we should be focusing on safety and soundness and real solutions that will get the economy going, getting the credit markets lending again and also creating jobs.

Minnesota’s primary election yesterday produced former U.S. Senator Mark Dayton as its Democrat candidate for governor. He will run against Republican Tom Emmer this November.

Arnie Carlson, a Republican who was governor from 1991 to 1999, told more than 100 bankers attending the Independent Community Bankers of Minnesota convention in Brainerd last Friday that the next governor will face the most significant challenge a Minnesota governor has ever had to deal with - balancing a budget that is currently projected to show a deficit of $6 billion to $7 billion.

Carlson commented that Dayton’s plan to raise taxes on high-income Minnesotan’s won’t raise enough money to solve the problems. Furthermore, he said Dayton’s definition of high-income is set so low it in fact includes many middle class households.

Carlson put the blame for the deficit on current governor Tim Pawlenty, who is exploring a 2012 race for presidency. He said his budget tactics have merely delayed difficult decisions which must be made. He said 40 percent of the projected deficit is the result of pushing expenditures into the future and deferring decisions which should have been made earlier.

Carlson said national party leaders will not endorse a candidate for president who failed to make the tough decisions at home.

Carlson called on Pawlenty to produce a budget now, so candidates for governor can debate its merits and flaws during the remainder of the campaign. He said only the governor’s office as the resources to produce a credible state budget; it is not something the candidates can do on their own.

It’s crunch time in the Senate for financial industry regulatory reform. Sen. Dodd needs to get his bill passed by Memorial Day for a realistic shot at enactment into law this year.

For community bankers, it boils down to this question: Are the TBTF remedies in the legislation compelling enough for community bankers to accept additional regulatory compliance obligations?

Questions will always surround legislative efforts to resolve TBTF “once and for all.” There were a lot of people who thought we solved that problem in 1991 when FDICIA was passed, and clearly it is a bigger problem today than ever.

Resolution authority on TBTF needs to extend beyond the confines of the traditional banking industry so it can address situations like AIG. The House bill and the Dodd bill does, and that’s a good thing. But there will always be this question: Who exactly will qualify as systemically important? Is it just the 19 original TARP recipients? Is it the top 50 holding companies? Who are the non-bank companies that qualify? Who will pay into the pre-paid resolution fund proposed by the House legislation and the Dodd bill? What if a company that never paid into that fund needs special handling? What if the government decides a company that did pay into the fund shouldn’t be treated special?

And how strong will the resolution authority be if the legislation drops the pre-paid resolution fund concept, as apparently is being discussed in the Senate to win support from Republicans? 

Clearly, the largest banks in the country have a cost-of-funds advantage over community banks. But if the law does in fact end TBTF, will community banks make more money as a result of the new, level playing field?

From the perspective of sound public policy, we need to resolve TBTF, but if we do, I am not sure how much that will improve the lot of community bankers. The American taxpayer will benefit from the resolution of TBTF but only community bankers will pay any kind of a price (that is, additional reg burden). Some bankers will say it is worth that price, but I wouldn’t be surprised if some say it isn’t.

Bank of North Dakota drew an interesting distinction, earning a carve out in the health care reform reconciliation bill. Politico has the story. Snippet:

“There is a provision in the reconciliation bill that shields the Bank of North Dakota from new restrictions on private student loan companies.

The bank is a nonprofit, and the only one in the country owned by a state. Given the unique status of the bank, it will be exempted under the reconciliation bill.”

President Obama tried to defuse some of the hotter allegations about political deal making in the health care reform debate during his contentious interview with Brett Baer of Fox News, saying, for instance, that some of the perceived sweetness of the so-called Louisiana Purchase applied not just to Louisiana but to any state that was recovering from a natural catastrophe: he instanced Hawaii. North Dakota Senator Kent Conrad made a similar point about the student loan rules for banks. Again, from Politico:

“It would apply…to every state. Any state that has an institution like this would be exempt.”

Conrad and his colleagues allow, however, that Bank of North Dakota is “a unique situation.”

The banking industry is focused on Washington, D.C., and Orlando this week. This morning, about 1,000 bankers are meeting at the Renaissance Washington D.C. Hotel for the American Bankers Association’s government relations “summit.” Speakers scheduled to address bankers this morning are John Bowman, acting director of the Office of Thrift Supervision, John Dugan, Comptroller of the Currency, Rep. John Boehner (R-Ohio), Sen. Evan Bayh (D-Indiana) and Karen Mills, administrator of the U.S. Small Business Administration.

This afternoon, many of the bankers will meet with representatives and senators from their own states. The bankers’s timing is particularly good with Sen. Dodd releasing his draft of reform legislation on Monday. Several state associations, such as Wisconsin and Minnesota, have scheduled their annual Washington conferences this year to coincide with this ABA event.

Tomorrow, the bankers will hear from FDIC Chair Sheila Bair, Fed. Governor and former ABA Chairman Betsy Duke, Sen. Richard Shelby (R-Ala.) and Rep. Steny Hoyer (D-Md.)

Today also is the start of the annual convention of the Independent Community Bankers of America, which is taking place at the Gaylord Palms in Orlando, Fla. The association says it expects 3,000 people to participate. There is a directors’ seminar today, and there are break-out sessions set for most of tomorrow. General sessions on Friday and Saturday will feature Fed Chairman Ben Bernanke, Bair and Dugan, as well as Steve Forbes and author Jim Collins.

At the convention, James MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich., becomes ICBA chairman for 2010-2011. Ironically, Art Johnson, the current chairman of the American Bankers Association, also hails from Michigan. Look for a feature on the two leaders of the national trade groups in the April 1 edition of NorthWestern Financial Review.

The commentary section of NFIB’s monthly analysis of business trends opens with a simple declaration: “Washington still does not get it.” But that’s mere throat clearing. After pointing out how politicians talk about small business’s crucial role in employment, NFIB’s William Dunkleberg and Holly Wade make the following (selected) observations:

“When it comes time to provide help, small business gets $30 billion IF banks decide to accept the TARP funds to support loans and IF the owners can subsequently get a loan from a bank. But for most firms, this dinky amount is of little help…

“…Plans for capital expenditures and inventory investment among small firms are at 35 year lows. Even large bank CEOs now admit loan demand is weak! ‘Stimulus’ for this administration has not focused on supporting consumer spending nor been designed with a sense of urgency…Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms…

“The National Bureau of Economic Research is expected to declare a recession bottom in the second half of 2009…NFIB indicators do not appear to agree however. At the end of the 1982 recession (Q4, 1982), the [Optimism] Index value was 98, the percent of owners viewing that period as a good time to expand was nine percent and the net percent expecting better business conditions was 47 percent. The [most recent Optimism Index] value is 89.3, the percent of owners viewing the current period as a good time to expand is five percent and only a net one percent expect better business conditions in the first half, not really strong signs of a turn in the economy.”

Several reviews of On the Brink, the new book by former Treasury Secretary Henry Paulson, pick up on an anecdote about a dinner party where Chuck Prince, former Citigroup CEO, gave a glimpse not just of his anxiety about Citi’s investment activities but also of his bank’s dependence on government guidance. Prince is quoted as saying:

“Isn’t there something you can do to order us not to take all of these risks?”

We know it’s wrong but we just can’t stop. Don’t over-regulate us, but do save us from ourselves.

Ben Bernanke won a second term as Fed chairman last week. In renomination terms the Senate vote was a squeaker, with 30 senators voting against. The next closest not-very-close vote was for Paul Volcker, who was reconfirmed as Fed chair in 1983 by a vote of 84 to 16.

Eight of the 28 Senators who represent NorthWestern Financial Review’s readership area voted against Bernanke: Sam Brownback (R-Kan.), Byron Dorgan (D-N.D.), Russ Feingold (D-Wis.), Al Franken (D-Minn.), Charles Grassley (R-Iowa), Tom Harkin (D-Iowa), Pat Roberts (R-Kas.) and John Thune (R-S.D.).

Opposition spanned the political spectrum. Democrats Harkin and Franken said the Fed under Bernanke was lax in consumer protection; Feingold also opposed the Fed’s reluctance to have its actions reviewed. Republican Brownback criticized the Fed as too beholden to Washington and Wall Street. In an interesting regional twist, he proposed that Tom Hoenig, president of the Kansas City Fed, would make an able alternative to Bernanke.

“Mr. Bernanke is a gentleman and has a powerful intellect, but we need a different perspective at the Fed,” Brownback said. Hoenig “is a practical Midwesterner from outside the Beltway who would bring a common sense view to the Fed and to our monetary policy,” he said.

President Obama will deliver his state of the union address this evening. The longer he talks, the less effective he will be. At this point, we don’t need more talk; what we need are meaningful actions.

The president, for example, is going to tell us that he is implementing a spending freeze, but this will do virtually nothing to reduce our deficit, given that all the big-spending programs will be exempt and the ones that will be included have incredibly bloated budgets already. More words, Mr. President, just don’t do any good. Take some real deficit-reduction actions, tell us about it after you’ve done it, and then we will all feel a little better.

The president may say something this evening about financial services industry reform in the context of improving the economy. But, here again, I wish he would just keep the words to a minimum. I appreciate the fact that the president says he wants to end too big to fail, but until some actions are actually taken to end it, I am tired of all the words. President Bush (the first one) was ready to end too big to fail also in the early 1990s, and that led to the passage of FDICIA, but as we have seen in the last 18 months, that piece of landmark legislation did not solve the problem as advertised.

Changing the rules governing the banking industry will do nothing to give the economy a boost. The business sector simply needs clear signals that the market will be allowed to work. Inconsistent government intervention in private commercial affairs has made it impossible for business people to predict what the business environment will be like in the near future, so they are less willing to venture out with new enterprises. They are hunkering down.

But at this point, of course, it would be very hard to believe that the Obama Administration has any interest in backing off. So for tonight, I really prefer fewer words. Some big actions in the next few months — like figuring out what to do with Fannie and Freddie — would go a much longer way toward restoring confidence than even the most eloquent of speeches this evening.