Sunday, October 18, 2009

Mopping the left out area

Many opportunities have been presented to the Obama Administration to correct the reckless bonuses of big banks and each of those opportunities have been squandered; with total disregard to 'what is fair to taxpayers' and what is good for American Economy in coming years. It is obvious that reckless risk for higher compensation and bonuses created market for CDOs which should not have been sold in the first place as well as mortgagees which should not have been given to start with. That brought American and global economy to knees, TARP was approved and by Summer of 2009 American Banks were saved, economy was saved on the basis of taxpayer money. In normal circumstances that would have prohibited the banking industry to stop bonuses.

But that has not happened and American Congress and Administration have failed so for to stop it; having left things for banker's own decisions without any disciplinary actions. Time has come for Congress and Administration to undertake and implement tough compensation policy. Bothering compensations may seem like a less important concern when it comes to saving economy since many argue that 'corporate transparency' is the real key there. It may sound vindictive too. But that is all false. It is the question of accountability and fairness. Democratic politics is all about fixing responsibility on those who caused such a great grief and who still continues to have such a potential to pull all of us down into another hole in future.

What needs to happen as far as compensation reforms go?

1. As Fed Chairman Bernanke mentioned in a testimony to Congress, banks which undertake risky transactions, banks which have large portfolio and banks which are intricately interrelated with the global financial system (i.e. those who pose 'systematic risk'); need to maintain higher capital base. Meaning Goldman Sachs and JP Morgan in today's world need to maintain higher capital reserves than yesterday. The Architect of this Great Recession - Alan Greenspan - in the end agreed to this proposition too. (He went further to support the contention of dividing these large banks as well, not that his advice has anymore credibility apart from admission of the mess he created.)

2. As long as banks do not confirm to these higher capital reserve ratios, no bonuses should be paid to any employees of those banks. Relaxation of 'mark-to-market' rule is helping many banks to show higher capital reserves artificially, Wells Fargo is the case in point, and that essentially leaves these banks to continue the payout of huge bonuses. These relaxed rules will be going out soon, starting from next year; but as far as bonuses go; those rules must be applied today. Further, any bank which has received tax payer money in last 12 months should not be allowed to pay out any bonuses as well.

3. Bonuses which have been paid after TARP injection of funds need to be claw backed as per the regulation. If that is difficult, bring that money into the bank reserves. If that is difficult, hold out money to all those employees in future assuming paid bonuses as advance future compensation. And if those employees have left banks; apply retrospective income tax of 75% payable in next few years. Yes, it is vindictive. But what do you want - a fair system or nuance in being easy on bankers?

4. If Congress is going to take time for promulgation of these laws, then Administration should undertake execution of various existing legal provisions to prevent these bonuses. What is wrong in having 75% income tax on all bonus income above 100K limit for employees of all banks or financial companies, private or public, which do more than run of the mill 'loans and savings' transactions? The reason is Technology companies or Public Utility Companies did not bring the Great Recession. It is these big banks and financial institutions which brought this recession. Now is the time for them to payback.

So the question is - is Obama Administration ready to 'mop up the area' which it has left so far or it wants be beholden to Financial Industry?

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