FED´S PLAN ON BANKER PAY DIVIDES INDUSTRY / THE WALL STREET JOURNAL

SEPTEMBER 19, 2009

Fed's Plan on Banker Pay Divides Industry

By DAMIAN PALETTA and DAVID ENRICH

Bankers and lawmakers are sharply divided over the Federal Reserve's plan to review -- and possibly veto -- the way that thousands of U.S. banks pay their key employees.

Some welcomed the Fed's proposal as necessary to guard against excessive risk-taking at financial institutions, while others were angered by the central bank's move to expand its oversight powers.

The split sets up a showdown in the next few weeks as the Fed completes work on a final proposal that would let it reject any compensation policies deemed to pose a potential threat to a financial institution's soundness.

While the roughly 25 largest U.S. banks would get the most scrutiny, overall the plan would give the Fed sweeping powers over executives, traders and loan officers at more than 5,000 banks.

The proposal, which was first reported Friday in The Wall Street Journal, will "give [regulators] another opportunity to have someone come in and tell us how to run our business," said Edward Wehmer, chief executive of Wintrust Financial Corp., a Lake Forest, Ill., company with about $11 billion in assets and 79 branches. "It's opening Pandora's box," he said.

Others in the business applauded the Fed's plan, saying it wouldn't affect banks with prudent pay practices. "I like it," said Steve Steinour, chief executive of Huntington Bancshares Inc., Columbus, Ohio. "Having disciplined pay practices is good for the country long term," he said. "I do believe people should be paid with a view of how much risk they're taking."

Amid the debate, other bank regulators could soon take similar steps. The Office of the Comptroller of the Currency has recently begun reviewing policies regarding compensation standards at the national banks it regulates, according to a person familiar with the matter.

White House officials didn't comment directly on the Fed plan. In a speech on Friday, White House National Economic Council Director Lawrence Summers echoed many of the principles outlined in the Fed proposal, suggesting that the Obama administration is at least tacitly in favor of the plan.

"Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system," Mr. Summers said. "The key is to ensure that the right incentives are in place for long-term value creation."

A final proposal is still a few weeks from completion and could be revised, according to people familiar with the matter. It requires a vote by the central bank's board, but no congressional approval.

Under the plan, regulators wouldn't set the pay of individuals, but could require changes to salary and bonus policies to make sure they don't create harmful incentives. The Fed believes it can police compensation through its powers as the "safety and soundness" regulator for banks it monitors.

Sen. Richard Shelby (R., Ala.), the top Republican on the Senate Banking Committee, said there were "important unanswered questions regarding the basis for the Fed's authority and approach on this matter." Some Republicans question whether the Fed has jurisdiction over pay issues.

Fed officials have shifted their view on compensation, now seeing it as possibly exposing individual banks -- and even the broader financial system -- to serious danger. The financial crisis of the past few years spawned many examples of excessive risk-taking encouraged by compensation, such as loan officers who earned lucrative bonuses for churning out thousands of low-quality loans that later went bad.

House Financial Services Committee Chairman Barney Frank (D., Mass.) praised the Fed's move but said a bill he helped pass through the House still needed to be signed into law because it would clear up ambiguity regarding whether the Fed had the authority to take such steps.

The Fed's proposal generally aligns the Fed more closely with European regulators as the Group of 20 world leaders prepare to meet in Pittsburgh next week. There has been a growing global debate over the way bank employees are paid ahead of the G20 meeting. Officials in the U.S. and abroad worry that if they don't coordinate their approaches, some countries could draw away talent from others.

In the U.S., the Fed's plan will further inflame the debate between those who feel it bank pay too high and those who resent Washington's reach into the private sector. Banking lobbyists are "going to push back, said Patrick Doyle, a partner in the banking practice at law firm Arnold & Porter LLP in Washington.

Some bankers said the Fed's move is an indictment of a system that lets banks get too big. "If institutions were not allowed to grow so large as to threaten the entire financial system, then federal intervention such as this would not be necessary," said Chris Nunn, chief financial officer of Security Bancorp of Tennessee Inc., a Halls, Tenn., banking company with nearly $700 million in assets.

In the past, small-business owner Clement Suttmann of Leland, Mich., says he always favored free-market policies. But after his banks all but shut funding for his candle-making operation over the past year, the 54-year-old had a change of heart. "After what's happened to us and what happened to millions of small businesses. I say, let them have it," said Mr. Suttmann, who helps run his company with his wife, Holly. "This is a giant mess-up and we're not getting any help."

—Jane J. Kim, Sara Schaefer Munoz and Andrea Thomas contributed to this article.

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