Chamber of Commerce defense of Wall St. bonuses is bad for the economy

The 2008 financial crisis cost millions of Americans their homes, their jobs and their savings. While many factors contributed to the financial crisis, wrongdoing at financial services firms was one of the main causes. Unscrupulous mortgage lenders wrote trillions of dollars in high-risk loans. Big Wall Street Banks repackaged these bad loans as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) and sold them to investors around the world, representing them as safe investments. Big insurers sold trillions in credit default swaps (CDS), allowing for rampant speculation on a plethora of different asset classes.

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All of these activities were high-risk, high-reward for those who engaged in them. From loan officers who were paid by the number of loans they wrote to Wall Street bankers whose bonuses depended on the volume of CDOs they sold to unwitting investors, to traders whose bonuses depended on the performance of their speculative bets, compensation in the financial services industry incentivized inappropriate risk-taking.

Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act was written to limit the type of incentive-based compensation in the financial services industry that resulted in the inappropriate risk-taking that helped cause the financial crisis. Six years after the original passage of Dodd-Frank, the regulatory agencies charged with drafting the implementing rule have finally issued a second version of a proposed rule.

Last week, the U.S. Chamber of Commerce submitted a comment opposing the proposed rule, arguing that it is unnecessary and too strict.

The Chamber's comment shows that it has learned none of the lessons of the financial crisis. In the Chamber's Pollyanna view, the American "economy is built to encourage prudent risk taking ... which yield positive externalities like job creation, productivity, and financial stability." And yet nothing was prudent about the speculative orgy of risk, greed and fraud that resulted not in job creation and financial stability, but rather in mass unemployment and financial meltdown.

In the Chamber's alternate universe, regulating incentive-based compensation to ensure that it does not threaten the financial health of financial services firms "might also chill the kind of risk-taking—lending, financing, investing — that spurs economic growth and job creation." Nowhere does the Chamber acknowledge that inappropriate risk-taking and the huge bonuses that incentivized it are what actually chilled lending in the aftermath of the financial crisis and resulted in the worst economic contraction since the Great Depression.

While the Chamber makes many technical arguments against the proposed rule, two are worth mentioning.

First, the Chamber contends that the proposed rule's deferral and clawback provisions are too onerous. Such provisions are designed to discourage inappropriate risk-taking; deferral of incentive-based compensation is designed to encourage executives and managers to pursue sounder, more long-term strategies rather than privileging short-term gains that may allow them to reap huge bonuses while simultaneously imperiling the financial health of their firms and perhaps even the economy as a whole. Clawback provisions allow companies to take back bonus pay that has already been awarded if it turns out that it was originally awarded for strategies that subsequently go south.

The Chamber argues that both the deferral and clawback periods are too long, despite the fact that the proposed rule would allow senior executives to receive 70 percent of their pay within two years. Given that the typical business cycle lasts at least five years and a typical credit cycle lasts even longer, the Chamber's contention that the proposed deferral period is too long is illogical. If a deferral rule is truly to incentivize longer-term strategic thinking, then bonus pay must be deferred through at least one business cycle.

Second, the Chamber argues that restrictions on incentive pay will result in a "brain drain" of "talent" to other industries and other countries. And yet for several decades, far too many of America's best and brightest have gravitated toward Wall Street, lured by the promise of astronomical compensation packages. As a nation, it is this brain drain to Wall Street that should trouble us. We should be concerned that our economic system incentivizes people to work in a sector of the economy that is not among the most socially useful and productive.

What's more, productivity gains in the U.S. have been in a prolonged slowdown. It is worth asking whether excessive bonuses on Wall Street are related to this productivity slowdown. Innovation is one of the primary factors driving productivity growth, and when so many great minds are hoovered up by finance, there are fewer left to innovate in the real economy. One wonders where our nation might be today if Wall Street compensation were more reasonable and more top talent had instead chosen to work in medical research and other socially useful fields. Might we already have succeeded in curing cancer and other deadly diseases?

Attempting to restore some sanity to Wall Street compensation practices is important if we are to avoid a repeat of the financial crisis. It also may be an important part of recalibrating our economic system so that top talent is drawn to more diverse sectors of the economy rather than being concentrated on Wall Street. While the Chamber purports to be defending the interests of the broader American economy, its dogged defense of unbridled bonuses on Wall Street proves once again that it is really looking out for the narrow interests of some of its wealthiest donors.

Dudis is the director of Public Citizen's U.S. Chamber Watch Program.


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