Monday, December 7, 2009

Fed’s Dudley Is Feisty on Bank Pay, Bubbles and AIG

Posted by: Zachary Pienkowski

In a feisty and expansive speech, New York Fed President Bill Dudley says he finds it “galling” and “unfair” that employees at bailed out banks are raking in big pay packages, but he says regulators need to be careful about cracking down on it.

Here it is in his words:

“This issue of compensation is obviously a hugely potent one, as there is a fundamental unfairness in what has happened over the past few years. The actions taken by the Federal Reserve and others to stabilize the financial system had the effect of rescuing many of the same financial institutions that contributed to this crisis. Many of those financial institutions are now prospering, and many of their employees will be highly compensated. This situation is unfair on its face. But it is even more galling in an environment in which the unemployment rate is 10 percent and many people are struggling to make ends meet.

“Despite the fundamental unfairness of the situation, I don’t think it is feasible or practical for the Federal Reserve, or any other supervisory entity, to attempt to determine the level of compensation at individual firms on an ongoing basis. A better approach is for supervisors to ensure that a firm’s compensation regime is consistent with an institution’s safety and soundness and with broader financial stability. That can and should have important implications for the level of individual compensation. For example, a trader should not be paid solely on the basis of this year’s accounting profits if those profits are based on the valuation of illiquid assets held on the bank’s books that could easily go down considerably in value before they are liquidated.”

To continue reading this article written by Jon Hilsenrath, click here


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