Barney Frank calls for bonus moratorium

They should still allow bankers to receive cheese boards and popcorn cans and those gift baskets with the weird canned meats and stuff.

Is he just dumb or is it political pandering?

barney frank is an obama supporting socialist. what else do you expect?

It's probably mostly hot air, but it sounds like a pretty solid idea. How about a $100k cap in direct compensation? I like that.

i guess it was political pandering.

ccdevi - could you elaborate on why the think the proposal is "dumb"?

Given the tremendous subsidies being given to banks by the federal government, isn't there a good argument for making sure that money doesn't effectively end up going to compensation?

Of course I understand that employees leave if they don't think they're sufficiently compensated, but it's unclear why (given all the bank regulation and subsidy going on) the government shouldn't also think about how to restructure that compensation so as not to provide incentives for the sort of risk-taking that contributed to the current crisis.

JohnDoe, there is a huge difference between re-examining the compensation structure and placing an outright moratorium. Frank's plan would basically punish everyone in finance, even those who are doing well for their firms, however few that may be in this economy. And moreover, what criteria would need to be met in order for the moratorium to be lifted? If liberals have their way, I could see a scenario in which the government places a limit on bonuses, and we witness the biggest brain and capital drain away from this country, in modern history.

barney frank is right...I hope he gets it through the congress

I'm guessing that if Congress were to ban bonuses, subject to finding a less destructive compensation structure, the brain trust on wall street would come up with many potential solutions before bonus season 2009 (and probably before bonus season 2008). For '08, it's unclear how different a ban on bonuses and the actual situation (sans ban) would be at any rate.

It's not that I support his plan (it seems a bit extreme), but I just don't think it's obviously stupid.

On the one hand, there's a concern about driving employees from these companies, and on the other there's a concern about how to avoid future crises. Both are legitimate and serious concerns. The second seems a bit more pressing right now. The best solution probably addresses both concerns (and others), rather than simply emphasizing the latter (as per Rep. Frank's suggestion). That said, I don't think wall streeters can quickly find lucrative opportunities elsewhere right now, so the magnitude of the first concern may not be as great as many seem to suppose.

Bonuses are just deferred compensation, so the same principles of sink or swim, up or out, would still apply when it comes to reward incentive.

When Obama becomes president with a democratic congress and senate their are going to be huge changes. In my opinion they are much needed. Wall street needs to change but I agree that the street will find a way to make money, they always do.

"could you elaborate on why the think the proposal is "dumb""

Well the idea of comp caps was dumb when initially proposed (when the "bailout" was going to be just the govt buying illiquid assets for at least the following 4 reasons:

1 Who gets capped? Presumably everyone at the firms getting govt help. You mean not only the mortgage guys but the m+a guys who simply broker deals and get paid huge fees? Dumb, and of course this applies to all the people who weren't involved in the bad businesses. Look at AIG, you're going to cap the guy running the insurance business which makes billions because the credit derivative guys are idiots? Dumb.

2 Who gets capped? You cap the guy who comes aboard now, presumably to help stop the bleeding, the guy who wasn't involved in getting the firm in the mess in the first place? Dumb

3 How much? McCain said no one should make more then a the highest paid govt official, TheFed up top said 100k. Do I even have to finish the thought? How are you going to keep the talent, you think there's no where these guys can go to get paid? Think again. Dumb and even dumber when we flip to the govt taking equity positions in these talentless companies.

4 The idea was for the govt to buy assets, why do they get to then tell these companies what to pay their people? Makes no sense. Makes more sense when the govt buys equity in the companies but then see 3 above.

Now lets address Frank's comments. He wants to cap "all firms"? What firms? How do you define that? Regardless of whether they are in the "baliout" or not. What gives him that power? Why don't we cap all businesses. JohnDoe, I don't know what you do, but should we cap your compensation? I understand that some think this "bailout" is a move towards socialism (I prefer to think of it simply as a govt hedge fund), but isn't this over the line. So to be clear we're going to cap some guy at some firm, they guy runs some investment desk which doesn't do mortgages and lets assume has done very well, and the firm is not participating in the "bailout." How does that make sense? I'm not good on my ism's but isn't that communism or at the very least nbaism, what is this a salary cap?

"They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,'' and if it causes losses ``you don't lose anything.''

This is my favorite quote. Its great on multiple levels. "negative incentive?" So Barney, it incentives them to do poorly?? Well no. More importantly, the answer is....um well yeah. Thats how it works. The individuals risk the firms capital. When they make money they get a percentage and so does the firm. Its like a hedge fund or a PE fund, or a pool player who gets staked, or in some sense a professional athlete (actually they have it better then bankers, they get paid whether they or the team does well or not, why doesn't Barney Frank want to cap Arod?).

If you're saying that the percentage is too great, or that there should be a clawback in bad years, well ok, but thats for the firm to figure out, its management, its board of directors, and indirectly its stockholders.

Thats all I can type and btw I'm not on Wall St and would not be affected by this in the least.

ok I can type a little more. JD you made 2 pts above:

"I don't think wall streeters can quickly find lucrative opportunities elsewhere right now"

Not everyone, but the best guys can, and the 2nd and 3rd best. The proposed caps I mentioned above are less then an associate is making at a decent PE fund.

"and on the other there's a concern about how to avoid future crises" "restructure that compensation so as not to provide incentives for the sort of risk-taking that contributed to the current crisis"

You want to do that? Regulate the way they do business, how much leverage they can have, etc. We do that in lots of industries. Compensation caps is not the way to go, where does that end? Gas is too expensive, we should cap the oil exec's comp, and heck the guys out in the oil fields too. Cars are too expensive and the auto industry is broker...

Hey Barney, I agree with a cap since I doubt very few CEO's are worth $50-$100 million plus. Now what say you about restricting campaign contributions, pork barrel projects and fact funding junkets to warm climates during winter months. Oh wait, only the private sector is full of theives.

Paying bonuses in restricted stock with long vesting periods - a trend that is already well underway - probably achieves the same purpose more effectively. An outright ban seems like an invitation to all sorts of unintended consequences.

I think West81st's perspective is an interesting and reasonable one.

I also think it's pretty understandable why the public is restless about taxpayer money effectively going to pay outsized cash bonuses. Think the talent will go elsewhere? I doubt it. Most have strong connections to this country and won't be easily enticed to go to The Isle of Man, The Cayman Islands, or Lictenstein. Not so clear either why firms should be paying out taxpayer bailout money to shareholders as dividends when they're reporting massive losses.

The natives are understanbly restless. And regime change is afoot.

ccdevi, the analogy to oil is not apt. With finance, the concern is that the very bonus structure provides incentives for the type of behavior that produced the mess. Bonuses in oil don't *produce* higher oil prices; the market does.

As I said earlier, "It's not that I support his plan (it seems a bit extreme), but I just don't think it's obviously stupid."

ccdevi, you're arguing against compensation caps. I certainly never suggested that. I don't even think the Frank proposal suggests that. I think he's just suggesting taking a "hatchet" to a deeply flawed compensation structure, until there is a better one in place (which better structure need not necessarily have caps).

So, if one agrees that the current compensation structure is deeply flawed, and that it should be replaced, I guess the only additional point Frank adds is that we should scrap bonuses (i.e., the flawed structure) until an adequate replacement is found. Again, not my proposed solution, but hardly stupid (especially if one thinks a new structure could be put in place quickly enough to avoid a painful loss of employees).

I generally agree with West81st that compensation should move toward longer vesting periods and with ccdevi's suggestion of clawbacks. Make bankers internalize more of the economic consequences of their deals to their employers - not just the immediate gains, but also longer term losses (should they mterialize).

As to the question of regulation, banks have always been regulated. The banking industry, generally, has shown over the last decade an inability to responsibly handle less regulation. Seems like it would make sense to try greater regulation. Insofar as that regulation is aimed (at least in part) on reducing risk, I'm not sure why it would be inappropriate for compensation schemes to be regulated in some way as well (again, this isn't a suggestion about salary caps, but just about what types of incentives are actually provided).

I'm sorry but his suggestion is stupid for all the reasons I suggested above and more. why you chose to focus on the throw away oil analogy is beyond me.

Should Lazard no pay bonuses this year? Why? why is that fair to the people who work there? The answer of course is no and its not, and you're off to the races...how do you choose the firms.

"So, if one agrees that the current compensation structure is deeply flawed, and that it should be replaced, I guess the only additional point Frank adds is that we should scrap bonuses (i.e., the flawed structure) until an adequate replacement is found."

And again its up to the individual companies, their boards and if need be their shareholders to fix those systems. Why would the govt have anything to do with this? You think Barney Why doesn't the govt just tell Goldman what they can charge for a sell side advisory engagement while we're at it?

"When Obama becomes president with a democratic congress and senate their are going to be huge changes. In my opinion they are much needed. Wall street needs to change but I agree that the street will find a way to make money, they always do."

Problem is, where do you think Obama got the money to get elected?

You think $100 mil last month came from Chicago hot dog eaters?

A good place to start with firms might be firms taking government bailout money (preferred stock purchases or otherwise).

As for compensation being up to the boards - the boards have demonstrated an inability to design a compensation system that works. If you agree that it is appropriate for government to heavily regulate banks, I'm not sure why the scope of regulation wouldn't apply to compensation. If you don't think it is appropriate for government to heavily regulate banks, why is the mismanagement that led to the current financial/credit mess not enough to convince you that the previous level of regulation was not sufficient to maintain a financial system that functions well?

"And again its up to the individual companies, their boards and if need be their shareholders to fix those systems. Why would the govt have anything to do with this? You think Barney Why doesn't the govt just tell Goldman what they can charge for a sell side advisory engagement while we're at it?"

The government has its say when these companies screw the pooch and show up with their tail between their legs asking to be bailed out (or saved or whatever assistance they have been given). It certainly wasn't just one guy at one firm that made the bad decisions here, this was an orgy of incompetence. Let us not forget the companies like citi that have been labeled as "too large to fail" due to their importance rooted through their sheer size. They can get smacked with this regulation stick too.

I wouldn't necessarily support something like this, but as we are quasi-nationalizing the financial system in this country, it really makes sense.

ccdevi - I agree with most of what you have posted...and quite eloquently I might add. The government restricting compensation or capping it is a slippery slope that should not be travelled down. It will lead to WAY more problems.

That's not to say that I think changes should not be made and that CEO's who ran their companies into the ground shouldn't get a nickel, but this proposal is political pandering at best and outright stupidity at it's worst....and I am about as far left as you can get politically.

Why should the govt decide what every doctor or lawyer or singer or NFL star should get paid? Some professions are more noble than others, some's value is more direct or easy to measure, some invariably involve creeps. But Has anyone questioned why banks paid so much to their best performers? if it was such an unqualified job, and it paid so well, wouldn't ppl line up to get it? (and they did) and if they did line up to get it, wouldn't it automatically screen the best ppl for that job?

All i am saying is its a market for talent. If A-rod or Mr Favre are worth $$$ without directly adding much value to society in a direct fashion (of course indirectly they may). Thats a free market. Don't envy A-rod, try to be better than him and get paid more than him. Having lived in a not so capitalist country for a bit, and dealing with people daily from more such countries, all I can say is the govt must stay out of controlling compensation. I'm not taking sides with some of the greedy bankers and idiots who drove their firms into the ground. Specially if you will the board with your cronies, thats not free markets, thats aristocracy.

So the govt must ensure it creates a level playing field. Put the right rules and referees in place, and let the players sort it out. This is a country where you can achieve what you dream of and climb up through effort and luck. Not where you feel better by ensuring mediocrity. All great nations were built by leaders and via entrepreneurial spirit. There is a right spot between absolute control and no government at all... one that fosters the right competitive spirit without killing endeavor or concentrating undue power in a few hands.

"A good place to start with firms might be firms taking government bailout money (preferred stock purchases or otherwise)."

Well maybe but thats not what Frank suggested. Not to mention that it incentives firms not to participate.

" the boards have demonstrated an inability to design a compensation system that works"

I'm not sure you can make that statement with such certainly, these companies were making money hand over fist for a long time. Regardless you (and the politicians) are making way too much about compensation. This crisis wasn't caused by compensation and won't be fixed by it either, its a drop in the bucket, well a couple drops.

"I'm not sure why the scope of regulation wouldn't apply to compensation"

Again for all the reasons I've mentioned and more. None of which you've really addressed by the way. Here is a simple example. You are a star m+a investment banker at Citi or some other shop thats going to take govt assistance. You do deals and Citi makes huge fees off your work and you get paid a lot for it. You don't lever up the company, you make money the old fashioned way. If the govt says ok Citi employees are capped at $500k a year, what are you going to do? You're going to walk across the street to an unregulated IB, maybe one of these boutique advisory firms, whatever, and make your big money again. So how is that good for Citi or the govt who has taken equity in Citi? and of course there will be tons of other Citi employees doing the same.

And yes I do think regulation on comp is fundamentally different then say regulation on how much capital a bank must have on hand. I'm not sure I can adequately explain how, its one of those things like porn, l know it when I see it. Again if they are going to regulate comp, why not the fees they charge? Why not be involved in strategic decisions? The day to day operations of the bank. Is that what govt should be doing? Not to mention that they would be terrible at it.

Can we be fair about this? I work on Wall Street and I will give up my bonus, but Barney Frank has to give up his bonus too. Obviously Congressman Frank doesn't get a cash bonus, but we all know what drives him is media time and public exposure. I will give up my bonus if Congressman Frank confines himself solely to legislating, does so in a non-partisan manner, and does so in writing without seeking media attention or providing his opinions for provocation.

By the way, I'm not sure why so many of you are getting animated here. The government has no power to restrain compensation unless such restraint was agreed contractually during the investment. The only way to contemplate a real limitation would be through the Constitutional process.

Challenge my assertion as you may, but you'll be incorrect.

"he government has no power to restrain compensation unless such restraint was agreed contractually during the investment. The only way to contemplate a real limitation would be through the Constitutional process."

Well thats kind of why I'm animated about it (that and the fact that its just a dumb idea). Its just un-american. But you said it a lot better than I did. I agree as well on Frank, its all a political show, which also gets me animated. And people fall for it obviously, which also....

Stevejhx is Barney Frank!

Seems to me that if the government is now a big owner, it should have a say in pay.

I'm all in favor of bonuses - they're excellent motivators. But when the firms are losing money hand over fist - well then everyone - particularly top management - should participate in the downside of the bonus system. It's been heads I win, tails I win for too long!