New York City Comptroller John C. Liu, who oversees $108 billion in pension funds, said Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley should target senior executives’ pay to prevent improper or risky practices.
Liu filed shareholder requests with the three New York- based banks to toughen their so-called clawbacks, which allow the firms to reclaim pay awarded to employees who acted improperly. The lenders, which now limit clawbacks to individual wrongdoers, should target supervisors as well, Liu said in a statement today. The city’s pension funds held $483.3 million in shares of the firms through Dec. 19, according to the statement.
Perverse incentives and bad compensation practices helped cause the financial crisis by encouraging Wall Street employees to disregard risk in the pursuit of profit, according to a study last year by the Council of Institutional Investors. Liu targeted the three firms as they have each paid more than $100 million over the past 18 months to settle charges of improper conduct tied to mortgage-backed securities.
“No one should profit or be rewarded with bonuses when engaged in improper or unethical behavior,” Liu said in the statement. “These tougher clawback provisions will not only recover money that shouldn’t have been paid in the first place, but also set the tone for a stronger standard of conduct for company executives as well as their bosses.”
JPMorgan, the biggest U.S. bank, and Goldman Sachs, the fifth-biggest, only try to recoup executive compensation after “material” losses, which creates “unrealistically high legal and financial standards,” Liu said. The proposal would delete the word “material” from the requirement, according to the statement. The two firms as well as Morgan Stanley, the sixth- biggest U.S. bank, should make any clawback actions public, according to the proposals.
Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, agreed to pay $550 million in July 2010 to settle regulators’ claims it misled investors in products tied to subprime mortgages. JPMorgan agreed to pay $153.6 million to settle a similar suit in June. Morgan Stanley agreed to pay $102 million in June 2010 to settle claims by Massachusetts that the firm financed and securitized unfair residential loans.
Jeanmarie McFadden, a Morgan Stanley spokeswoman, declined to comment on the comptroller’s request, as did David Wells at Goldman Sachs and Howard Opinsky at JPMorgan.
Paul Hodgson at Forbes expressed his opinion, Clawing Back Wall Street Pay:
It is comforting that the New York City Comptroller is calling for tougher clawbacks to be applied to Wall Street pay. The Press Release gives a great deal of detail about the resolutions that have been filed at Goldman Sachs, JPMorgan and Morgan Stanley, including the full text of one of the proposals itself. In short, the Comptroller, John Liu, is calling for changes to existing clawback arrangements as follows:
Increase executives’ accountability
Goldman Sachs’ and JPMorgan’s current clawback policies only hold executives responsible for “material” losses, creating unrealistically high legal and financial standards for clawback actions. The proposal asks the word “material” be stricken from the two firms’ clawback policies in order to lower this barrier that protects executives from being held accountable. Morgan Stanley’s existing clawback policy does not include the “material” hurdle so this request is not part of the proposal filed at that firm.
Hold supervisors responsible for bad behavior
Current policies at the three firms limit clawbacks to employees who take excessive risks or engage in improper or unethical conduct. Under the current system, a senior executive can benefit when a subordinate engages in improper conduct that generates profits in the short-term, but that ultimately causes financial or reputational harm to the firm. The proposal seeks to eliminate this perverse incentive.
Disclose clawback actions
The proposal asks that the three firms’ clawback policies be amended to require disclosure of any decision by their boards on whether or not to recoup executive compensation. Currently, they do not have to make clawbacks decisions public.
Global governance research firm GMI has been collecting data on clawback policies at all companies since 2006 when firms began to adopt these policies voluntarily. Since then, of course, they have been mandated by the Dodd-Frank bill, though the SEC has not implemented the rule as yet. In addition, all the banks had to implement clawback arrangements under TARP regulations, though some, like JPMorgan, already had policies in place. For example, according to GMI almost two-thirds of the S&P 500 have some form of clawback policy, though few, if any, will be as strict and wide-ranging as those put forward by Mr. Liu.
As I said, it is comforting to see these proposals being put forward at the banks, and the immediate cause of the proposals – the fact that the three banks have recently paid out more than $100 million in fines to settle charges in connection with their engaging in fraudulent practices surrounding mortgage securities investments.
$100 million between the three banks?
About the size of a decent bonus for any of the CEOs prior to 2008, so hardly much of a dent in each of the banks’ finances.
“No one should profit or be rewarded with bonuses when engaged in improper or unethical behavior,” Comptroller Liu said.
But the fact is, they already have done, and, while laudable, this initiative is – if you’ll forgive the resort to the proverb – closing the barn door after the horse has bolted. Hardly more than a handful of individuals, really, despite the mountains of evidence collected by the feds, has got into any kind of serious trouble and, as far as I know, none have had to pay much of their bonuses back. Yet every single one of the executives at these banks have received stock and cash as incentives that were based, at least in part, on earnings and income that turned out to be illusory.
Never mind clawing back the bonuses, these executives should be trampling over each other to voluntarily return at least a portion, if not all, of the incentives they earned for a fair number of years prior to the debacle in 2008. So should every individual that was involved in packaging and selling CDOs and credit default swaps or who was responsible for anyone that was involved, so, basically, every single executive. If they just got on with it then, apart from the money it would save the authorities not having to prosecute them, the goodwill (my middle name by the way) it would generate would go a long way to restoring trust in the financial system.
Zuccotti Park is not too far from Mr. Liu’s office.
Poor banksters, not only are they being vilified by Main Street, now some pension funds are demanding clawbacks on their bonuses. 2011 has certainly been a tough year. But never to be outdone, banksters are fighting back, joining billionaires to debunk ‘imbecile’ attack on the top 1%. And no matter what happens, they can still profit from money for nothing and risk for free. Yes folks, don't worry, in this world, banksters take it all.
In all seriousness, what banks really need is good old alignment of interests. Buffet and Soros know all about alignment of interests. In fact, all corporations need radical reforms to achieve better alignment of interests at the executive level and so do private and public pension funds. If you want to talk clawing back pension pay, have I got a book for you!
Below, Liam Dalton, chief executive officer at Axiom Capital Management Inc., talks about hedge fund investment strategies. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." It seems that hedgies are turning more bullish. Maybe they finally woke up and realized that the biggest tail risk in 2012 is a good old fashion melt-up. Just remember who uttered the words "Houston, we have liftoff" first. Unlike banksters, I don't get money for nothing and risk for free, but am beautifully positioned for La Dolce Beta! Ho! Ho! Ho! Merry Christmas!