Yesterday, the FDIC Board unanimously approved a "clawback rule" that will allow it to reach into the deep pockets of Wall Street executives and recoup their pay in case of such liquidation. For all the hooting and hollering from the Professional Left about how the Administration is not beating up on Wall Street enough, yesterday's action by the FDIC is among the most important in a series of serious attempts by the Administration to put safeguards in place to avoid a repeat of the calamities of 2008. The GTLE Blog has a great summary of what the new rule would mean:
Provides a negligence standard (in contrast to the gross negligence standard under many state laws), under which the FDIC will deem an executive or director “substantially responsible” for the company’s failed condition if he or she “failed to conduct his or her responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.”
Creates a presumption of culpability, placing the burden upon certain senior executives and directors (e.g. high level executives or anyone who “had responsibility for the strategic, policy making, or company wide operational decisions”) to demonstrate that they exercised the requisite standard of care or, if unable to do so, to prove that their conduct did not “individually or collectively” result in a loss that materially contributed to the company’s failure.
Authorizes the FDIC to recoup “any” compensation received by the senior executive or director (current or former) in the past two years, including not only salary and bonuses but also other forms of compensation. In the case of fraud, no time limit applies.
While the critics, the cynics and the sensationalized media are too busy crying, whining and screaming, the real work of reform continues. The the Dodd-Frank Wall Street reform law signed by President Obama last year grants regulators significant power over banks, especially those that pose a threat to the financial system at large. One such power is the power to liquidate financial institutions before they have a chance to cause systemwide panic, which is the authority FDIC used to issue the new rule. A few things I want to point out here: first, this targets both the Boards of Directors as well as executive management of financial institutions. This is significant given that Boards often exist to rubber stamp bank CEOs rather than to provide oversight. This is meant to force the Board to do its job.
Most news reports you will read or see on TV will simply call this a clawback rule, which is without a doubt a very major part of it, but just as important is how that rule is applied. It wouldn't make any sense to say that the FDIC could recoup costs from executive compensation if the standards to meet to collect those fees were nearly impossible. The point of the rule was to make sure that Wall Street executives, you know, did their job and were invested in the institutions they were responsible for, rather than simply serving self enrichment purposes.
It's with an eye towards that ultimate goal that the FDIC crafted measures that have teeth and can work as a true deterrent. Gross negligence, which is the current standards - practiced under state laws no less - is monumentally difficult to prove. Moreover, a financial executive should not be negligent at all; I believe what they should be is diligent instead. In essence, the negligence standard under FDIC tells executives that they better stop looking at simply covering their bottoms and actually do their jobs. If these awesome "talents" on Wall Street are good at anything other than self-enrichment, well, it's time to put up or shut up.
The part of the rules that puts the presumption culpability on the executives could be easily described as the "buck stops here" rule. After all, if your business fails, do you get to go around blaming everyone but yourself? It shouldn't be any different for Wall Street tycoons either. If a whole financial institution is going under, its management must take responsibility. That is all the FDIC is saying.
Lastly, the administration has caught onto the fact that Wall Street fatcats pay themselves in much more than salaries. Bonuses, stock options, preferred stock options, loan forgiveness, you name it. It's not at all unusual for executives to make less than half of their total compensation in salaries. So the regulators left no loopholes. If the executive made it from the bank or financial institution, it is on the line. Two years worth of your pay. And if you commit fraud? The FDIC can recoup your compensation going back as long as they want.
Of course, notes the FDIC, banks were not very happy with this "do your job" regulation thing on their executives.
Some comments took the position that substantial responsibility should be based on state law or already established legal standards. One comment took the position that substantial responsibility should exist based solely on the failure of the covered financial company with no inquiry into conduct.Translation: hey man, we were doing pretty good screwing the country and the financial system under the old rules, don't change them! And if you have to hold us accountable, whether we did our job or not shouldn't matter in determining just how much we're liable for.
The FDIC wasn't having any of it, of course.
The Final Rule clarifies that the standard of care and provides that a senior executive or director would be deemed "substantially responsible" if he or she failed to conduct his or her responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.Translation: Are you smarter than a fifth grader? :-) FDIC continues:
The revision clarifies that the standard of care that will trigger section 210(s) is a negligence standard; a showing of a more egregious breach of care, such as 19 gross negligence, is not required. [...] The burden of proof, however, is on the senior executive or director to establish that he or she exercised his or her business judgment. State "business judgment rules" and "insulating statutes" will not shift the burden of proof to the FDIC or increase the standard of care under which the FDIC as receiver may recoup compensation.i.e., Nice try, bankers, but you need to prove that you people can actually do the jobs you make a gazillion dollars for, and no, you will not get to use a bank-lobby written state law to insulate yourselves from liability. It's not too much to ask that these high priced executives be required to prove that they were doing their job, is it? This is a very tough rule with a straightforward message to executives: if you don't do your job and your institution collapses, we're coming after your pay - you will no longer get to walk away from the disastrous financial ruin you create.
The FDIC also notes that the regulators now have this power only because of the Wall Street reform that passed last year: a law that the Right spent all its time trashing and trying to block and the Professional Left spent all its time deriding and ridiculing.
This is the difference between talking and doing. Everyone can scream about "bailouts" and wax poetic about what went wrong. But the hard work is about putting things right and building a system of real accountability with means to enforce. That is what President Obama and his administration have consistently focused on. It's easy to throw dirt. It is much more difficult to do something constructive. It is much more difficult to actually provide regulators with the tools to hold the financial industry accountable, and in the face of lobbying dollars in DC, it may well be even more difficult to actually get the regulators to use those tools. The Obama Administration, here, has succeeded on both fronts: both on getting Wall Street Reform passed into law, and in using it crack down on abuses.
There will of course still be those who will ignore the facts and continue to berate President Obama as a Wall Street puppet. There will also be those who will ignore the facts and continue to call President Obama communist. But the truth is that President Obama is on the side of the American people; he is on the side of results. Ideological warfare looks great on TV, but in reality the only thing that matters is making progress. This new FDIC rule is yet another progressive step toward building a stronger, more accountable financial system.