Fed Plan to Police Bank Pay Unlikely to Curb Risk

It's the boldest idea yet to rein in Wall Street recklessness: Put the Federal Reserve in charge of policing not just the nation's banks, but also how much their employees are paid.

FILE - In this Oct. 1, 2009 file photo, Federal Reserve Board Chairman Ben Bernanke testifies on...

FILE - In this Oct. 1, 2009 file photo, Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington before the House Financial Services Committee. The Federal Reserve for the first time would police banks' pay policies to ensure they don't encourage employees to take reckless gambles like those that contributed to the financial crisis, according to a proposal unveiled Thursday, Oct. 22. (AP Photo/Evan Vucci, file)

(AP)

But can it work?

Some experts say the plan might help correct a pay system that has long rewarded those who make the sort of high-risk bets that triggered the financial crisis. Others see it as merely a short-term fix that wilil have little effect on making banks act more prudently.

The biggest concern is that as long as the government stands ready to rescue troubled banking giants, there's little to discourage traders from making potentially calamitous gambles on stocks, bonds and exotic financial products.

"Outsized pay that is a result of taking lots of risk is a problem," said Bill Fleckstein, a Seattle-based hedge fund manager. "But the real problem is the fact that these institutions have a setup where it's heads they win, tails the taxpayer loses."

Signs suggest that system still exists today. Only a year after the financial crisis peaked, the biggest banks are already making billions again placing risky bets with help from cheap government loans and other federal subsidies.

If those bets were to go bad, the loss to taxpayers could be immense. That's led some critics to call on the government to ban big commercial banks from trading risky securities — or shrink them so their collapse wouldn't jeopardize the economy.

The Obama administration and the Federal Reserve have resisted such calls, opting instead to seek the authority to take over and wind down large banks that get into serious trouble.

On Thursday, the Fed took a different tack, detailing plans to address the outsized compensation and risk-taking blamed for fueling the worst financial crisis since the Great Depression.

Under the plan, the central bank wouldn't set compensation, but it would review pay polices — and veto those found to encourage excessive risk-taking by executives, traders or loan officers. Even banks that didn't benefit from the taxpayer-financed bailout would be subject to the Fed's compensation oversight.