More Business as Usual

NY TIMES:


As Wall Street returns to profitability, it is eagerly returning to business as usual. Most notably it is preparing to pay enormous bonuses, like those that encouraged the sort of risk taking that set off the financial crisis.

That point was underscored in an article in The Times on Sunday by Gretchen Morgenson, which described a new study by James F. Reda & Associates, an independent compensation consultant in New York.

The study used proxy filings to analyze the pay plans at 191 of the nation’s largest companies in the first half of 2009. Instead of seeing a greater reliance on long-term incentive programs, the report found that most companies have actually made short-term incentive pay a bigger part of the compensation package.

The report covered 21 financial firms. Three, including Goldman Sachs, had reported no changes to their pay policies. JPMorgan Chase, in contrast, had put more conditions on pay, generally allowing the bank to attach more performance benchmarks and to impose a longer wait before pay is awarded.

Ideally, banks would be free to compensate employees as they saw fit. But that must be accompanied by reforms that ensure that banks can no longer profit from primarily speculative activities or other excessively risky transactions — including regulating the opaque derivatives markets and imposing limits on the use of borrowed money to increase profits.

The Obama administration unveiled a broad reform plan in June. But Congress has yet to tackle the most far-reaching issues. Meanwhile, despite the recent evidence to the contrary, Treasury Secretary Timothy Geithner told The Wall Street Journal last week that he did not think the financial system was reverting to past practice, adding, “and we won’t let that happen.”

In the absence of comprehensive reform, however, rules are urgently needed to ensure that pay, at least, does not invite outsized risk taking. A recent House bill largely punted on the issue. The Senate has yet to act.

Mr. Geithner seems to think that Americans begrudge Wall Street its profits out of ignorance of the importance of healthy banks. That misses the mark.

They begrudge profits that come at the expense of others, like taxpayers, who do not share in them but are on the hook for the losses. Until the financial system is reformed — to ensure that the old mistakes are not repeated — they have every reason to be angry.