Bair Supports Reining in ‘Eye-Popping’ U.S. Banker Compensation

By Alison Vekshin and Erik Schatzker

Aug. 6 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair, citing “eye-popping” salaries at U.S. banks, joined House Democrats and the New York attorney general in seeking tougher compensation standards for lenders.

Bank regulators should use their authority to set pay standards that are “principles-based,” without establishing specific limits, Bair said in an interview in her Washington office yesterday with Bloomberg Television. Guidelines should cover workers such as mortgage brokers along with top executives, she said.

“I’m not sure I buy this, that all these eye-popping salaries are necessary to keep folks for competitive reasons,” Bair said. “We do need to revamp the system to make sure that the incentives are long-term.”

Bair is weighing in on the debate in Washington for more government involvement in shaping pay packages at U.S. firms, which some lawmakers have blamed for encouraging reckless risk- taking that contributed to the financial crisis. Changes would be part of legislation Congress is writing to revamp industry rules to prevent future crises.

The U.S. House last week approved legislation that would let shareowners hold an annual non-binding vote on pay packages and would give regulators authority to restrict compensation that spurs employees to take more risks. Republicans in Congress oppose government setting pay and some Democratic senators are reluctant to support pay limits.

Lawmakers expressed outrage this year at American International Group Inc.’s decision to pay $165 million in retention bonuses while getting a U.S. rescue package valued at more than $182 billion.

Cuomo Report

New York Attorney General Andrew Cuomo reported last week that nine banks getting U.S. aid paid $32.6 billion in bonuses last year and 4,793 employees got more than $1 million. Cuomo urged industry to set pay that encourages long-term growth, and said if industry fails to act such change “should be discussed as part of the federal regulatory reform effort.”

Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation for the first six months, up 33 percent from a year ago and enough to pay each worker $386,429, the company said last month. The average ratio of compensation to revenue at securities firms this decade is about 48 percent, Sanford C. Bernstein & Co. said in a report.

“I do wish some of these firms would exercise better restraint and common sense on what they’re paying their folks,” Bair said.

Public confidence in the banking system has improved after lawmakers more than doubled the insurance coverage for deposits, Bair said. “We’ve stabilized the situation,” she said.

Bair said she’s concerned about “how bad the economy will get” as more loans become delinquent because people lose their jobs. Unemployment in June was 9.5 percent, and President Barack Obama has said the rate will exceed 10 percent this year.

Bank Failures

Bank failures, which have reached a 17-year-high of 69 in 2009, will “keep up at a pretty good pace” through 2010 and should subside in 2011, Bair said.

The FDIC will probably impose an emergency fee on banks in the fourth quarter, the second special assessment this year to replenish the deposit insurance fund, she said. The FDIC in May said its fund, generated by fees banks pay, fell to $13 billion in the first quarter from $17.3 billion in the previous quarter.

Bair is asking Congress to consider her proposal to create an industry-supported Financial Company Resolution Fund the government would use to unwind a “large or complex” institution and discourage companies from growing too large. Lawmakers are weighing changes to the Obama administration’s plan to revamp rules governing the financial-services industry.

Companies with more risk would pay more into the fund, she said yesterday. The reserve doesn’t have to be “huge,” shouldn’t be capped and could eventually reach hundreds of billions of dollars, Bair said.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Erik Schatzker in New York at eschatzker@bloomberg.net.