In light of what he called in February a "reckless culture and a quarter-by-quarter mentality," President Obama's administration indicated that it is looking for ways to create tighter controls over pay in the banking sector. The administration is seeking ways to make employee compensation mesh with performance, something that it believes hasn't been happening.
"We had a period where compensation practices just became completely unmoored from reality, defied gravity, and they created incentives for risk-taking that overwhelmed all the basic checks and balances in the system," Treasury Secretary Tim Geithner in an interview with Associated Press.
The administration is considering working through federal agencies such as the Federal Reserve or the Securities and Exchange Commission. The Fed, for example, could prohibit banks from giving bonuses for quantity rather than quality of loans made by banking loan officers.
The rules may also come through the legislature. Representative Barney Frank, a Massachusetts Democrat, is putting together a bill that would give the government stronger authority to audit and control incentives if they are judged to threaten the economy.
The proposed new rules are still in the planning stages, but they are already proving controversial. Top bankers are opposed to the idea, which many have called either unrealistic or potentially damaging to the banking sector. Without incentives, they argued, many top employees can leave for the wild west of hedge funds. Furthermore, they said, government micromanagement isn't how banking works.
In addition, critics point out that the new rules would target not only the paychecks of top banking executives but also many employees below them. They would also apply to all banks, not just those who have taken government bailout money.
Right now, however, banks are not in the best position to bargain their case.
"As long as they are general in nature and could be enforced on a case-by-case basis," said Edward Yingling, chief executive of the American Bankers Association, according to the Wall Street Journal. "What would never work is detailed regulation of compensation."
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