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Three Cheers for FDIC Chief Sheila Bair

If bankers didn't have enough agita from pay czar Ken Feinberg getting all up in their faces, they now have to contend with another hated foe threatening to crack down on their compensation practices: FDIC chief Sheila Bair.

The agency announced today that it's exploring ways to spur banks to improve their pay policies. The goal is to "provide incentives that promote the use of compensation programs that reward employees for focusing on risk management."

That could lead to banks that take greater financial risks having to pay higher deposit insurance fees to the FDIC. Banks that do a better job of linking employee pay to long-term corporate performance could be rewarded with lower premiums. The agency's Deposit Insurance Fund was drained dry last year in absorbing losses from scores of failing banks.

"A broad consensus of academic studies agrees that poorly designed compensation structures can misalign incentives and induce risk taking," Bair said during an FDIC meeting this morning to discuss the proposal. "I share those concerns. The recent crisis has shown that compensation practices that encourage excessive risk can create significant losses in the financial system and the deposit insurance fund."
It's worth noting that the FDIC itself is divided on the plan. OCC head John Dugan and OTS chief John Bowman voted against issuing the comp proposal for comment, and they suggested that there's no link between bankers' pay and their risk appetite. Uh, huh. Their solution -- let Congress and the Federal Reserve take the lead in addressing the issue.

That brought this stern response from Bair:

"I must say to take a position that we should not even be asking these questions is not one that I can understand. I also cannot understand why we need to keep waiting. We need to keep waiting for this or that, and in the interim, nothing changes. We just maintain the status quo, and the longer we try to [implement] meaningful reforms, the more momentum for that dissipates. We are simply asking the question....To suggest this agency shouldn't do anything when there is such an overwhelming amount of evidence that this is clearly a contributor to the crisis and to the loses that we are suffering, I just cannot understand that."
Bair is widely despised within financial industry circles. That proves she's doing a good job.