Bonus Season Brings Political Risks For Banks Bonuses for employees of big Wall Street banks this year are expected to be sizable — further inflaming a public already infuriated over last year's bank bailout. For the banks, the issue is fraught with political risks as regulators search for ways to clamp down on bonuses.
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Bonus Season Brings Political Risks For Banks

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Bonus Season Brings Political Risks For Banks

Bonus Season Brings Political Risks For Banks

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It's MORNING EDITION from NPR News. I'm Steve Inskeep.


And I'm Deborah Amos.

Over the next few weeks, the country's biggest banks will tell investors how much they earned last year and how much they're handing out in executive bonuses. For the banks, this information comes with political risks.

The bonuses are expected to be sizable and will probably add to the anger over last year's bank bailout. NPR's Jim Zarroli reports that bank regulators are now searching for ways to clamp down on those bonuses.

JIM ZARROLI: Federal and state law actually gives regulators relatively little authority over how much bankers are paid. But that may be changing.

DOUGLAS ELLIOTT: The public is so mad about the compensation issue, that every player out there wants to show they understand that public anger, so they're all pushing forward.

ZARROLI: Douglas Elliott of the Brookings Institution says Congress, the Federal Reserve and the White House are all talking about ways to rein in bankers' bonuses. Yesterday, the Federal Deposit Insurance Corporation, which regulates many of the nation's banks, proposed raising insurance premiums on banks whose compensation practices encourage risky behavior.

Elliott says a lot of banks tie an employee's bonuses to the amount of money he or she earned that year. And that gives employees incentive to take short-term gambles, even if they suspect the strategy may lead to big problems down the road.

ELLIOTT: Because if you're a trader, all you have to do is have nine good years, make a lot of money, and then if you get no bonus in the 10th year, it's not that big a deal.

ZARROLI: Regulators have proposed several steps to reform the system. They want banks to impose clawback provisions on bonuses. That means employees might be forced to return the money they got if it turns out they did something especially risky.

They also want banks to issue more of their bonuses, not in cash, but in stock and require employees to hold onto it for longer periods. The thinking is that traders and bankers will take fewer risks if their personal wealth is tied to their employer's long-term health. Douglas Elliott says many banks have been chastened by the market meltdown and are already doing this on their own.

ELLIOTT: Look, and I'm speaking as a former banker here. We may be stupid, but we're not that stupid. The crisis really was very bad for the industry and the people in it. And collectively, there's been a lot learned, and that is being reflected in behavior now.

ZARROLI: But with Wall Street profits growing again, banks are also under growing pressure to hire the best employees, and they're doing that by offering big bonuses.

One bank official, speaking off the record, noted that some banks are once again offering guaranteed bonuses. They're promising prospective hires that they'll get their bonus no matter what happens - even if the person ends up losing the bank money.

That kind of lavish promise ups the ante for the industry as a whole. The same official said banks are also facing growing competition for the best talent from overseas financial institutions. All of that makes it much harder for banks to actually rein in their compensation, says Jay Brown of the University of Denver law school.

JAY BROWN: It's tough to be the one financial institution out there that pays reasonable compensation when everybody else is paying excessive compensation, or at least, you know, compensation that looks excessive, relatively speaking. There needs to be somebody that says, All of you must be more reasonable about this.

ZARROLI: That's what federal regulators like the FDIC are trying to do. But compensation consultant Allen Johnson scoffs at the idea that a bank's fees should be tied to how risky its compensation practices are.

ALLEN JOHNSON: That's about the silliest idea imaginable that the - an untrained regulator with 8,000 banks is going to go out and assess the risk of compensation programs, no experience, whatever.

ZARROLI: Johnson says it's really hard to figure out whether a specific compensation plan encourages risk and he's skeptical that regulators are up to the task.

JOHNSON: Well, they can hire thousands of people and this and that, but you can't even get experts to agree on what is a risky plan.

ZARROLI: But with public anger over last year's bailout growing, regulators are under increasing pressure to rein in bonuses. And over the next few weeks, that pressure is only likely to grow.

Jim Zarroli, NPR News, New York.

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