FSB's Draghi Says Bankers' Pay Is in the "Realm" of Regulators
Started by marco_m
over 16 years ago
Posts: 2481
Member since: Dec 2008
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By Joseph Heaven and Mark Deen Sept. 15 (Bloomberg) -- Financial Stability Board Chairman Mario Draghi said regulators are within their rights to limit bankers’ pay as the group draws up proposals for next week’s Group of 20 meeting in Pittsburgh. “Compensation is now fully in the realm of supervisors,” Draghi told reporters in Paris today after a meeting of the group of central bankers,... [more]
By Joseph Heaven and Mark Deen
Sept. 15 (Bloomberg) -- Financial Stability Board Chairman
Mario Draghi said regulators are within their rights to limit
bankers’ pay as the group draws up proposals for next week’s
Group of 20 meeting in Pittsburgh.
“Compensation is now fully in the realm of supervisors,”
Draghi told reporters in Paris today after a meeting of the
group of central bankers, regulators and government officials.
“It used to be they were told it was a private contract. It’s
now quite clear that when compensation is not aligned with risk
taking incentives, regulators have the right to have their
say.”
Draghi’s FSB will present President Barack Obama, U.K.
Prime Minister Gordon Brown and other leaders with proposals on
banking regulation and remuneration as the G-20 tries to agree
on rules to prevent another financial crisis. Draghi said that
the group agreed on a set of compensation principles today.
The global bonus pools of international banks should be
linked to their overall performance, Draghi said. The FSB also
wants to ensure that boards of directors have “effective”
oversight of pay, that bonuses are deferred and can be clawed-
back if the bank’s profit falters.
Policies developed by Stability Board are implemented by
national authorities and policed by peer review and the
International Monetary Fund.
The Basel-based organization’s meeting today came a year
after Lehman Brothers Holdings Inc. filed for the biggest
bankruptcy in corporate history, forcing governments around the
world to pour billions of dollars into banks to shore up the
financial system. Federal Reserve Chairman Ben S. Bernanke today
said the worst U.S. recession since the 1930s has probably
ended.
Obama Contrast
Earlier this month, finance chiefs from the G-20 united on
a plan to rein in bank bonuses and force lenders to hold more
capital to prevent a repeat of the global financial crisis. The
ministers left it to the Stability Board to add details to the
proposals in time for the Sept. 24-25 summit of their leaders.
Draghi’s comments contrast with those of Obama, who
yesterday said setting compensation limits on bank executives is
impractical because the administration would need to expand the
rules to other industries.
Shareholders and investors are the “best check” on
compensation practices and government shouldn’t dictate pay
standards for firms that don’t accept taxpayer funding, Obama
said Sept. 14 in an interview. French President Nicolas Sarkozy
is pushing the G-20 to curb banker pay.
Shareholder Payouts
Banking supervisors don’t have the power to insist that
companies in other parts of the financial services industry.
follow the pay standards, FSB Secretary General Svein Andresen
said. The compensation practices are “a problem” in many areas
of the financial services industry, he added.
The FSB also said regulators may have to consider limiting
bank payouts to shareholders as they build capital reserves.
“Now is the time in which we know that financial
institutions need to rebuild their capital levels,” said
Andresen. “They need to build their capital levels in
anticipation of higher capital requirements. In this environment
it is appropriate to restrict share buy-backs.”
Draghi signaled that the Stability Board isn’t pushing for
bank reserves to be built up too quickly. “We are fully aware
that these measures have to be implemented in a way that banks
don’t stop lending,” he said. “These measures have to be
phased in over time.”
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
This statmenet is so backward to be rediculous. The problem isn't compensation, but the method by which Wall Street and London determine profits from "trades". If bankers were paid on realized profits and not a present value of some some position that hasn't been closed out then appropriate comp would follow.
AIG wrote a ton of CDS and paid out bonuses based on it, yet the liabilities from those contracts were very much still on the books. Further more, we need smart regulation not more regulation. The regulators will never be smarter than the bankers, so why not take that into account and force CDS on to organized exchanges where information is not opaque. All the "bad" securities were private placments, so force the bankers to have to file publicly and risk the ire of all those hungry lawyers out there. Anyone notice the securities that got the worst wrap weren't IBM publicly filed debentures but unregulated, privately offered CDS?
Transparency, Disclosure and good accounting systems will do more to reduce egregious profits than any rules capping salaries at the seven figure mark.
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Response by truthskr10
over 16 years ago
Posts: 4088
Member since: Jul 2009
"Transparency, Disclosure and good accounting systems will do more to reduce egregious profits than any rules capping salaries at the seven figure mark."
Precisely, even go further to say if they actually enforced laws that are currently active. Nobody seems to go to jail. (madoff is an exception)
How is Charles Rangel still walking around??
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
On people's shoulders. I think they're throwing a parade for him under the guise of the great work he's done.. which is true. But just as this defense didn't help Senator Pot hole(Al Damato), it should not help him.
The Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it. Yet Citibank is allowed to operate.
Sometimes it's even worse. WE had laws that said bucket shop side bets were illegal and then comes along(I won't say the names) that made CDS legal and forbid the CFTC from regulating it!
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Response by marco_m
over 16 years ago
Posts: 2481
Member since: Dec 2008
riversider you hate cds and yet you clearly dont understand how the product works or how AIG really went down. CDS are not the problem. you can blame poor risk management if you want. Its not the gun...its the person. AIG paid bonuses from the hand out from the govt. If AIG didnt get that money, the street would have had no choice but to place them in bankruptcy.
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
Marco, I understand it all too well. AIG went down due to a margin call. They monetized their AAA rating selling, and had no effective risk management. This was an accident waiting to happen.
As far as bonuses, I had no issue here, Outside of AIGFP the company is staffed by hard working smart people. If paying a bonus in bankruptcy had the effect of saving the taxpayers money then I was all for it. And if there was someone in AIGFP needed to save the company future losses and it could be shown, then ok there too. But keep in mind, if the company went into receivership/chapter 11 or what have you, the bonus guarantees would have been ripped up. Something to think about..
My issues with CDS are due to the opaque nature of how it's done. If it were done on exchanges with proper margin, I would feel better about it. I also don't think it's a good idea to have derivatives that can't be tied to an underlying instrument....What I mean by that, is the underlying credits often don't trade except on a sporadic basis. If the underlying instrument isn't observable the models can't be calibrated. It's a big problem.
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
What's wrong with bankruptcy by the way? Totally legit way of handling an insolvency.. chapter 7 or chapter 11. Works very well. And in this country we have some very capable bankruptcy judges.
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Response by marco_m
over 16 years ago
Posts: 2481
Member since: Dec 2008
thats why cds are a great tool. it gives you an active pricing mechanism for illiquid bonds.
"If the underlying instrument isn't observable the models can't be calibrated. "
thats true for certain exotics, but not for plain cds.
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Response by marco_m
over 16 years ago
Posts: 2481
Member since: Dec 2008
Im a big fan of bankruptcy. should have been used on everyone. we'd be better off today, I bet
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
Thats why cds are a great tool. it gives you an active pricing mechanism for illiquid bonds.
If that's true one could price corporate debt off of it, and that's not exactly true either but always claimed. It's also tail wagging the dog and ignores that you can't price CDS. Information regarding contracts outstanding are not available to all. The whole concept of Novation in CDS is still a big deal.
Lastly holding a CDS on debt creates a disinsentive for bond holders to Credit analysis or agree to equity conversion if the Credit becomes impaired.
Again, I'd have less issue with swaps if they they became uniform contracts traded on an exchange with defined margin requirements and postings of contracts outstanding, and with position limits.
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Response by Riversider
over 16 years ago
Posts: 13573
Member since: Apr 2009
It's also kind of odd to have a CDS contract priced off an underlying instrument which itself never trades, or trades infrequently. Models only work when they can be corroborated with the real world. For example on Wall Street trading desks maintain models on on mortgages, estimating monthly defaults and prepays. At the end of each month they are compared to actual data published by servicing reports.
How does one fine tune a pricing model for CDS pricing if the underlying instrument is illiquid?
This statmenet is so backward to be rediculous. The problem isn't compensation, but the method by which Wall Street and London determine profits from "trades". If bankers were paid on realized profits and not a present value of some some position that hasn't been closed out then appropriate comp would follow.
AIG wrote a ton of CDS and paid out bonuses based on it, yet the liabilities from those contracts were very much still on the books. Further more, we need smart regulation not more regulation. The regulators will never be smarter than the bankers, so why not take that into account and force CDS on to organized exchanges where information is not opaque. All the "bad" securities were private placments, so force the bankers to have to file publicly and risk the ire of all those hungry lawyers out there. Anyone notice the securities that got the worst wrap weren't IBM publicly filed debentures but unregulated, privately offered CDS?
Transparency, Disclosure and good accounting systems will do more to reduce egregious profits than any rules capping salaries at the seven figure mark.
"Transparency, Disclosure and good accounting systems will do more to reduce egregious profits than any rules capping salaries at the seven figure mark."
Precisely, even go further to say if they actually enforced laws that are currently active. Nobody seems to go to jail. (madoff is an exception)
How is Charles Rangel still walking around??
On people's shoulders. I think they're throwing a parade for him under the guise of the great work he's done.. which is true. But just as this defense didn't help Senator Pot hole(Al Damato), it should not help him.
The Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it. Yet Citibank is allowed to operate.
Sometimes it's even worse. WE had laws that said bucket shop side bets were illegal and then comes along(I won't say the names) that made CDS legal and forbid the CFTC from regulating it!
riversider you hate cds and yet you clearly dont understand how the product works or how AIG really went down. CDS are not the problem. you can blame poor risk management if you want. Its not the gun...its the person. AIG paid bonuses from the hand out from the govt. If AIG didnt get that money, the street would have had no choice but to place them in bankruptcy.
Marco, I understand it all too well. AIG went down due to a margin call. They monetized their AAA rating selling, and had no effective risk management. This was an accident waiting to happen.
As far as bonuses, I had no issue here, Outside of AIGFP the company is staffed by hard working smart people. If paying a bonus in bankruptcy had the effect of saving the taxpayers money then I was all for it. And if there was someone in AIGFP needed to save the company future losses and it could be shown, then ok there too. But keep in mind, if the company went into receivership/chapter 11 or what have you, the bonus guarantees would have been ripped up. Something to think about..
My issues with CDS are due to the opaque nature of how it's done. If it were done on exchanges with proper margin, I would feel better about it. I also don't think it's a good idea to have derivatives that can't be tied to an underlying instrument....What I mean by that, is the underlying credits often don't trade except on a sporadic basis. If the underlying instrument isn't observable the models can't be calibrated. It's a big problem.
What's wrong with bankruptcy by the way? Totally legit way of handling an insolvency.. chapter 7 or chapter 11. Works very well. And in this country we have some very capable bankruptcy judges.
thats why cds are a great tool. it gives you an active pricing mechanism for illiquid bonds.
"If the underlying instrument isn't observable the models can't be calibrated. "
thats true for certain exotics, but not for plain cds.
Im a big fan of bankruptcy. should have been used on everyone. we'd be better off today, I bet
Thats why cds are a great tool. it gives you an active pricing mechanism for illiquid bonds.
If that's true one could price corporate debt off of it, and that's not exactly true either but always claimed. It's also tail wagging the dog and ignores that you can't price CDS. Information regarding contracts outstanding are not available to all. The whole concept of Novation in CDS is still a big deal.
Lastly holding a CDS on debt creates a disinsentive for bond holders to Credit analysis or agree to equity conversion if the Credit becomes impaired.
Again, I'd have less issue with swaps if they they became uniform contracts traded on an exchange with defined margin requirements and postings of contracts outstanding, and with position limits.
It's also kind of odd to have a CDS contract priced off an underlying instrument which itself never trades, or trades infrequently. Models only work when they can be corroborated with the real world. For example on Wall Street trading desks maintain models on on mortgages, estimating monthly defaults and prepays. At the end of each month they are compared to actual data published by servicing reports.
How does one fine tune a pricing model for CDS pricing if the underlying instrument is illiquid?