Clawback Act: Bank Executives Would Be Forced to Compensate Victims of Financial Collapse
It’s a rare day in Washington when progressive and conservative lawmakers actually find common ground. But that’s what happened when Senators Elizabeth Warren (D-MA) and J.D. Vance (R-OH) teamed up recently to introduce a bill that would force leaders of failed banks to repay some of their compensation.
The Failed Bank Executives Clawback Act would require top brass to cough up all or some of the compensation they received during the three years preceding a big bank collapse. The clawback would apply to directors, officers, controlling shareholders, and other high-level decision-makers at banks with $10 billion or more in assets.
With five Republicans and eight Democrats already behind the bill, it stands a real chance of Senate passage.
Ordinary Americans across the political spectrum are tired of seeing highly paid executives walk away unscathed from crises they create.
SVB CEO Greg Becker, for instance, had raked in tens of millions in incentive pay while pursuing high-risk strategies in the years leading up to the bank’s collapse. The most dangerous: his decision to invest funds from largely uninsured deposits in long-term bonds without preparing for inevitable interest rate increases.
According to a Public Citizen analysis, Becker exposed the bank to even greater interest rate risks by terminating a hedge against certain other securities. This maneuver helped boost the short-term value of SVB stock, and Becker made sure to get while the going was good. He even offloaded shares worth $3.6 million just days before the bank disclosed a large loss that triggered its stock slide and collapse.
The Warren-Vance bill responds to public outrage over such dangerous Wall Street greed. Hopefully it will sail through both chambers and become law.
But this Congressional action wouldn’t be necessary if regulators had done their jobs in the aftermath of the 2008 financial crash.
In response to that national crisis, Congress passed the Dodd-Frank financial reform. Section 956 of that law prohibits Wall Street pay which encourages excessive risk. But more than a dozen years later, regulators still have not put this part of the law into force.
If a strong regulation had been in place before the recent bank crises, executives at the failed banks would’ve had stronger incentives to focus on long-term stability and growth rather than taking short-term risks to maximize their personal gains.
For example, under Section 956, regulators could’ve required executives to set aside a significant share of their compensation every year for 10 years, an idea first proposed by former New York Federal Reserve Bank President William Dudley. This deferred pay would be used to help cover the cost of potential fines or bankruptcies.
With their own “skin in the game,” executives at SVB and Signature bank might’ve acted less recklessly and avoided collapse. If their banks had still failed, they would’ve had to automatically forfeit these deferred funds. A forfeiture action would be a lot easier than getting executives to pay back money they might’ve already spent on yachts or private jets.
The recent bank failures have provoked renewed pressure on regulators to enact this long overdue Wall Street pay restriction. In late March, 25 labor, consumer, and other groups sent a letter urging swift and rigorous action.
In Congressional hearings, Senator Raphael Warnock (D-GA) and Rep. Rashida Tlaib (D-MI) both asked FDIC Chair Martin Gruenberg if he supported this Wall Street pay restriction and he indicated he did. This past week Gruenberg told reporters that the rule would be issued by the end of this year.
It’s time for Washington officials to stand up to industry lobbyists and protect working families from the threat of Wall Street greed.
Senator Warnock recently described this disparity well. “I pastor in communities where poor and marginalized people have the full weight of the law come down upon them for the smallest infractions,” he said. “When bankers made risky bets that endangered our whole economy, they got to cash in. They should be held accountable.”Wait, before you go…
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