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So, you think Wall Street fat cats got away with it? Think again.
Sources at Bank of America/Merrill Lynch, JPMorgan Chase, Citigroup and the Federal Reserve tell FOX Business that the central bank is now wrapping up what the Fed itself calls its “deep dive” examinations of pay practices on Wall Street in a broad effort to stop pay incentives that government officials believe lead to "risky" business practices that helped trigger the financial crisis.
And the central bank’s examinations were broader and drilled much deeper into the ranks on the Street and into its pay culture than previously thought, from chief executives down to bond and loan underwriters.
Moreover, more firms could see their pay practices scrutinized and curbed by government regulators if they are deemed to be engaging in so-called risky behavior.
Moreover, the Dodd/Frank financial reform bill for the first time requires pay reviews and potential compensation curbs for executives at Fannie Mae and Freddie Mac. Also, even more firms than previously thought may have to abide by new pay standards under the Dodd/Frank reform bill, a Federal Reserve official says.
In fact, Wall Street firms expect the Federal Reserve to demand compensation caps for hundreds more employees in each company in an effort to stop of what bank regulators view as “excessive risk.”
But “it’s mass confusion” as to how the government will define a risky business practice, a Wall Street exec says.
Now Comes the Real Crackdown on Wall Street
Street sources say now comes the real crackdown on Wall Street pay, which could trigger even wider stock "claw backs" and stock-based pay deferrals for hundreds more employees on the Street, pay restrictions that are already underway, these sources say.
Specifically, the Federal Reserve is looking at pay for executives who run books of business with assets worth $1 billion or more, threatening to slap pay caps on them if the Fed deems their business practices pose a “material” risk to the overall company.
That means it could be $1 billion worth of bond trades, mortgage loans, "even a finance officer who oversees a division balance sheet," would be under the microscope, a Citigroup executive says.
Fannie, Freddie Face "Risky" Pay Restrictions For First Time
And for the first time, under the Dodd/Frank financial reform bill, Fannie and Freddie face risky pay prohibitions by government regulators, including the Federal Housing Finance Agency, the bill says. Reviews of their executive pay practices will begin in April of 2011, a Federal Reserve official says.
Fannie Mae and Freddie Mac collapsed into insolvency under the weight of massive losses from bad housing and subprime bets, and were taken into government conservatorship in the fall of 2008.
JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS) declined comment. Morgan Stanley (NYSE: MS), Fannie Mae and Freddie Mac did not return calls for comment.
Dodd/Frank Targets More Firms for Pay Reviews Than Ever
The Federal Reserve crackdown is more widespread than previously thought, and goes far beyond what pay czar Ken Feinberg dictated for banks who received taxpayer bailout money.
It allows the government to wade much further and deeper into the business practices of the financial services industry than ever before.
Under the "Pay Cap Review," section 956 of the Dodd/Frank financial reform bill, federal banking agencies, the Securities and Exchange Commission, the National Credit Union Administration Board, and the Federal Housing Finance Agency must “jointly develop, no later than April 21, 2011, regulations or guidelines implementing” new “disclosures and prohibitions concerning incentive-based compensation at ‘covered financial institutions’ with at least $1 billion in assets,” says Scott G. Alvarez, general counsel at the Federal Reserve.
“A ‘covered financial institution’ means a depository institution, registered broker-dealer, credit union, investment adviser, Freddie Mac, Fannie Mae, and any other financial institution that the regulators determine should be covered," by new “risk” pay standards, says Alvarez.
The fear is the term "any other financial institution" could mean hedge funds, private equity funds and venture capital funds now facing regular exams by the Securities and Exchange Commission under the financial reform bill.
Wall Street Says Fannie, Freddie Treatment Unfair
The April 2011 launch for risky pay reviews and prohibitions at Fannie and Freddie has caused criticism on Wall Street of inequitable treatment by the government.
Wall Street sources FOX Business spoke to say they are angered that Fannie and Freddie get a pass when they have already threatened taxpayers with massive losses.
“So Fannie and Freddie get their pay scot free, despite their huge losses, but we get smacked with pay caps now?” a Wall Street source says.
Fannie Mae chief executive Michael Williams received total compensation of $6.7 million in 2009; Freddie Mac CEO Charles Halderman received total compensation of $6 million.
What if Wall Street Balks?
Then the Fed will play hardball.
"Deficiencies will be factored into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions or take other actions," a Federal Reserve official says, adding the Fed "may take enforcement action against a banking organization."
That could mean a bank would have to fix the "deficiencies in its compensation," and/or the Fed would actually force the executive to pony up.
Excess Pay Fueled the Crisis
Government officials believe excessive pay incentives fueled the Street’s drive to recklessly engage in risky business practices.
“It is clear that flawed incentive compensation practices in the financial industry were one of many factors contributing to the financial crisis that began in 2007,” says Federal Reserve general counsel Alvarez.
A New Term Coined
And the risky pay crackdown has even coined a new term on Wall Street—“material risk taker,” or MRT. About 500 to 1,000 execs at Citigroup are now estimated to be deemed “material risk takers,” up from 200, bank sources say.
New Pay Standards Institutionalized
Federal Reserve sources say the new, tighter “risk” pay standards will now be institutionalized in the central bank’s regular reviews of Wall Street firms.
The Fed’s push comes as populist anger over Wall Street bailouts and fat cat pay have become a regular staple of re-election campaigns as the Congressional mid-term elections approach.
The government has come under fire for missing the housing and credit bubble, for massive Wall Street bailouts many say were too generous, and for not doing enough to restructure Wall Street's pay practices and the too big to fail problem.
Wall Street sources say the Fed crackdown and the new provisions in Dodd/Frank are the government’s backdoor way of trying to answer these criticisms.
Worldwide, bank writedowns and losses from the housing and credit crisis surpass an estimated $2.5 trillion, and continue to grow, though they are slowing down.
Already, European Union finance officials have moved to curtail bank pay across the EU, as union strikes and protests over fiscal austerity spotlight bank pay, and 20 million people in EU countries remain out of work.
Federal Reserve Drills Deep Into Wall Street’s Practices
Since the crisis began, Federal Reserve officials have been pouring into Wall Street firms scrutinizing bank practices. The Federal Reserve is invoking its statutory authority as a bank regulator in its risk pay reviews and prohibitions.
By law, the Fed is charged with ensuring the safety and soundness of US bank holding companies, a Fed official says.
A team of more than 150 Fed officials led the exams, including Fed lawyers, supervisors and economists, targeting Wall Street employees in structured finance divisions, trading desks and mortgage originations.
Federal Reserve “teams conducted 'deep dive' examinations of incentive compensation practices in trading and mortgage-origination business,” says Alvarez, the Federal Reserve’s general counsel.
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