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.
This is the kind of nonsense they are publishing today over at MSN, the folks who run hotmail. This article sets up the banker as the bad guy. The headline is Your Banker’s 6 Big Dirty Secrets.
Secrets? Are you kidding me? How dumb do they think people are? It’s a secret that if you have a checking account, the bank would like you to open a savings account too? Or, it’s a secret that banks have systems for assessing credit risk? Or, it’s a secret that banks leave it up to the customer to decide whether they need credit insurance? Come on! None of these things are secrets to anyone who has been around the block a time or two.
The implication, of course, is that bankers are deceptive, and that is just flat out bigotry against bankers. There is not an industry out there that is required by law to make more disclosures than banking. And, there is not an industry out there that has done more to promote financial literacy at all ages than banking.
I don’t understand these kinds of stupid articles, which insult both bankers and customers.
I can’t believe the headlines in this morning’s newspapers about the 57-41 vote last night in the Senate on financial reform. Sixty votes were needed for the legislation to advance.
The New York Times headlines says “GOP blocks debate on financial oversight bill,” and my local newspaper, picking up the same story, used this headline: “GOP blocks debade on financil overhaul.” What a bunch of bunk.
The truth is, now the debate can continue. Republicans and Democrats will continue to negotiate and real changes in the Senate bill are possible. Had the Democrats gotten 60 votes yesterday, the debate would be over. The bill would have moved to the Senate floor, but with 60 votes, what incentive would Democrats have to listen to Republicans? The answer is none, so if there is going to be debate it needs to happen now.
And we hear from Sen. Shelby, who spoke to hundreds of community bankers yesterday in Washington, D.C., for ICBA’s policy summit, that he is in negotiations with Sen. Dodd, and that compromises may be reached.
The Senate bill has a lot of problems. It won’t help most bankers. Fact it, both the House and Senate approaches to this problem simply rely more on the regulators who failed to avert a crisis in the first place. Regulators completely failed before so I am puzzled why lawmakers think it makes more sense to plow more resources and power into the regulatory apparatus to prevent a future crisis. To be fair, I don’t think more regulators will necessarily hurt, but I am highly skeptical that they will help.
I stated my solution back in the Feb. 1 edition of NorthWestern Financial Review. What we really need are capital requirements that increase with the level of risk a financial institution takes on, and rules which require lenders to retain some percentage of every loan they originate. Add rules for increasing transparency, and you will have what you need to prevent a future crisis.
If you want to introduce the topic of financial industry regulatory reform to the uninitiated, I think Paul Krugman’s column in Friday’s New York Times is a pretty good place to start. He boils the debate down to those who want to reduce or limit the size of the country’s largest institutions versus those who want to see more regulation. The Nobel Prize-winning, self-described liberal columnist says he favors more regulation.
Krugman doesn’t mention capital, but capital may be the point where regulation and size limits meet. New rules requiring the largest financial institutions to retain more capital are perhaps the best way to limit size through regulation. The practical affect of such requirements would cause some institutions to choose to shrink; those that choose to stay large would at least have the additional capital to handle bigger problems.
Equally important is the point Krugman makes about extending financial institution regulation to the shadow banking sector. I like the idea of non-banks engaged in bank-like activities being subject to bank regulation. The only problem is coming up with a system to examine all those non-banks the same way banks are examined. It would be a major undertaking to broaden the bank regulatory apparatus to thousands of additional businesses.
Keep in mind that when most businesses fail, they go into bankruptcy. The debate here is really about whether it is best for the country to give additional businesses an alternative to bankruptcy when they get into trouble. Traditional banks get resolved outside the bankruptcy system; how many more businesses should be moved outside that system?
However the debate shakes out, it is clear there is a reg-reform window of opportunity that will close this fall. Sheila Bair at the FDIC and Cam Fine at the ICBA say we need to exploit this opportunity. Others say the current proposals are so bad for traditional banks that no bill might be better than what the House and Senate are considering. President Obama seems to want financial reform legislation, so given the way the deck is stacked, I would bet we are going to get something.
Millions of people who have little background on the financial crisis will read David Leonhardt’s article in the New York Times magazine, to be published in print on Sunday. For that reason alone it is worth reading, even though it will shed little light on the situation for those who have been following the banking and broader financial services industry over the last few years.
The glaring omission in the article is the community bank sector. Leonhardt fails to provide an accurate picture of the credit allocation process in this country because he ignores 7,000 of the country’s 7,300 banks. He writes about how smart the Canadians are, but I don’t know that Canada is any source of innovation or entrepreneurial business activity the way the United States is. Community banks across the United States provide the majority of credit to our country’s small businesses, and this is where the jobs are. The strength of our country is its vast decentralized credit allocation system of thousands of community banks that are in position to fund small and medium size businesses which employee a majority of the country’s workforce.
You can’t have a very intelligent conversation about financial regulatory reform without acknowledging the diversity of players in our financial services system.
I am also struck by Leonhardt’s conclusion that a smaller financial services industry would be a good thing because this will free up the most intelligent members of the workforce to work for other, apparently more important, business sectors. He writes:
Highly leveraged financial firms became a dominant part of the economy. Their profits allowed the firms to recruit many of the country’s most sought-after employees – mathematicians, scientists, top college graduates and top former government officials. Yet many of those profits turned out to be ephemeral. So some of the best minds were devoted to devising ever-more-complex means of creating money out of thin air, the proceeds of which then drew in even more talent.
I think you could have a real discussion about whether these folks really have the best minds. I think Leonhardt gives way too much credit to the folks who came up with negative amortizing mortgages and securitization schemes that masked the quality of underlying assets. Many of the best minds I know belong to people who work in the community banking industry; it is a shame Leonhardt didn’t include them in his article.
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.”
Dave Nelson, longtime Wells Fargo and Norwest executive, will leave his post as president of Wells Fargo, Rochester, Minn., to become chairman and CEO of West Bank, and president/CEO of West Bancorporation, Des Moines. The Des Moines Register has the story. Here is the bank’s announcement.
The Bank of North Dakota is getting a lot of attention, not just from the Associated Press, but from politicians in California, Florida, Michigan, New Mexico, Ohio, Oregon and Washington state who wonder whether state-owned banks might be good for their states.
While we’re on the subject of banks with unique ownership structures, Stan Dardis, longtime CEO of St. Paul-based Bremer Bank will retire next month. Here is a profile of Dardis and his successor Pat Donovan. A snippet from Dardis:
“We make our way not through Wall Street, but through Main Street. We do business in our local markets, not in Chicago or New York. Our business is to serve the local communities where we have banks. This approach has served us well during good times and bad.”
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.
Anyone who works with numbers knows they can be deceiving. I have to call the Minneapolis-based Star Tribune on some numbers they ran in their Jan. 11 edition. Here is the online version of the article the newspaper ran about high concentrations of commercial real estate loans at some Minnesota banks. The print edition of the newspaper included a list of 17 banks that it says have commercial real estate loan concentrations equaling more than 400 percent of capital. The list does not appear online.
No. 14 on the list is Central Bank of Stillwater. It caught my eye because my colleague Tony Telschow and I just spent quite a bit of time researching this bank, which experienced phenomenal growth in 2009. When you receive your January edition of NorthWestern Financial Review in a day or two, you will see that we have named the management team at the bank — Owner John Morrison, Chairman Kurt Weise and President Larry Albert — our Bankers of the Year.
The Star Tribune article implies that high concentrations of real estate loans put these banks on shaky financial ground. But in the case of Central Bank, the numbers are misleading. A substantial portion of the real estate loans currently on the books at Central Bank came from failed bank acquisitions. Virtually all of those loans come with an 80 percent loss-share agreement with the FDIC. That means they pose little risk to the bank. Should a million dollar loan go bad, the FDIC will pick up $800,000 of the loss. Central Bank would never have acquired these assets had they not come with the FDIC loss-share agreement.
The article makes it sound as if these banks exercised poor judgment but in the case of Central Bank acquiring these assets was a savvy move. With the loss-share agreement in place, the bank picks up an investment with little down-side potential and tremendous up-side potential.
Data by itself never tells the whole story. You have to look beyond the numbers. To get a more complete story about Central Bank, be sure to read our January edition of NorthWestern Financial Review.
NPR’s Marketplace Morning Report had an interesting item this morning about how FDIC is considering charging higher fees for deposit insurance based on executive compensation models. The goal is to curb risk taking. The fees could be reduced if banks had clawback provisions for recovering bonuses paid on risky deals that wound up losing the bank money.
Reporter Nancy Marshall Genzer said, “the thinking is that bonuses based on quick profits encourage executives to take risks, and that’s what helped lead to the financial crisis.”
Listen to Genzer’s report here.
The FDIC is expected to vote on the proposal in its board meeting next Tuesday.
