Posted By thestatedtruth.com on November 1, 2009

Oct. 31 (Bloomberg) — The chief executive officers of 28 of the largest U.S. banks have been summoned to meet with supervisors at Federal Reserve banks to discuss new rules on compensation, said a person familiar with the matter.

The Fed this month said it will review the largest banks to ensure compensation doesn’t create incentives for the kinds of risky investments that brought the global financial system to the edge of collapse, prompting bailouts of firms including Bank of America Corp. and Citigroup Inc.

By summoning bank chiefs, the Fed is sending a message that it wants the pay reviews taken seriously, said Kevin Petrasic, an attorney at Washington law firm Paul Hastings and a former special counsel at the Office of Thrift Supervision.

“It starts with the CEO,” Petrasic said. “It is not subtle at all to tell the most highly compensated people in the organization, ‘Okay we are starting with you.’”

Chief executives at the Nov. 2 meetings will be briefed on so-called horizontal reviews used by regulators to compare banks and identify those where pay practices differ significantly from the norm, the person said. Among the topics to be covered will be how banks will share information with supervisors.

In May, the Fed conducted so-called stress tests of the 19 largest financial firms, including Wells Fargo & Co., Morgan Stanley, Capital One Financial Corp. and MetLife Inc. to ensure their capital was adequate to withstand a more severe economic downturn. This time, the Fed isn’t naming the banks and the compensation review will be kept confidential.

Sharing Information

Fed Governor Daniel Tarullo is leading an overhaul of the central bank’s supervision and is making greater use of firm-by- firm comparisons and the Fed Board’s research economists to help supervisors identify risks. Tarullo, who is President Barack Obama’s first appointment to the Fed, will give a speech on compensation in Washington Nov. 2.

The central bank’s action parallels efforts by U.S. lawmakers, the Obama administration and world leaders to overhaul incentives usually set by corporate boards and reduce threats to the financial system. Banks worldwide have taken more than $1.6 trillion in credit losses and writedowns since the financial crisis began around August 2007, according to data compiled by Bloomberg.

Risky Behavior

“The government wants to fan out the basic principles of reducing risky behavior and compensation design that supports that, such as stock payments over cash, clawbacks, pay tied to long-term performance,” said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates.

While the Fed’s proposed guidelines will apply to banks it supervises across the nation, the largest firms will have to describe plans to bring their practices into alignment. The central bank may take enforcement action against banks where compensation or risk-management practices threaten “safety and soundness” and no prompt measures are taken to address them, according to Fed’s proposed guidance.

“It’s possible that the Fed will be putting pressure on pay levels in this review,” said David Wise, senior consultant at the Hay Group in New York, a management consulting firm.

In their proposed guidance and in talks Fed officials have insisted that large pay packages will be viewed in light of the risks they generate.

Delayed Bonuses

Banks could make compensation more sensitive to risk, the Fed said in its proposed guidelines, by delaying the payout of a bonus. They could also extend from one year to two the period covered by performance measures and adjust bonus payments for any actual losses that become clear during the deferral period, also called a “clawback.”

Employees who expose a firm to large amounts of risk might receive smaller bonuses than those whose activities are less risky, even if both types generate the same revenue or profit, the Fed said.

Compensation practices at the thousands of smaller banks will be reviewed in the normal course of their risk management examinations. In 2008, the Fed supervised 5,757 bank holding companies as well as 862 state-chartered banks.

The Fed’s reviews come as a revival in stock and commodity markets have boosted trading profits at the biggest banks. The Standard and Poor’s 500 Index has jumped 53 percent since March 9.

Goldman Sachs Group Inc. set aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier and enough to pay each worker $527,192 for the period.

Almost three in five traders, analysts and fund managers believe their 2009 bonuses will either increase or won’t change, according to a quarterly poll of Bloomberg customers in six continents conducted Oct. 23-27.

More…..http://www.bloomberg.com/apps/news?pid=20601109&sid=a4F2nP9DxqKk&pos=11

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