Federal Reserve officials have started leaking the results of their investigation into banker compensation practices, and it doesn't look pretty: Most firms continue to pay their executives in ways that encourage risk, emphasize short-term gains, and seem wildly out of whack with the amount of government support their industry has received.
The Fed has a mandate to reform pay practices at the large banks it regulates -- a mandate that will get more teeth with the passage of the financial-reform bill. In the meantime, they are privately ordering banks to change their practices. These leaks are essentially shots fired at recalcitrant bankers and officials who want to let them off easy -- making these results public so early draws a line that the Fed won't be able to retreat behind without losing a lot of face.
Meanwhile, Steve Rattner, erstwhile car czar and semi-disgraced investor, is continuing his rebound tour with another op-ed in The Wall Street Journal (he wrote about his automobile adventure last time). Accurately titled, "Wall Street Still Doesn't Get It," the piece recounts a speech he delivered attempting to explain something everyone outside of Lower Manhattan seems to realize: The Obama administration is not going out of its way to punish the banking system. Rattner was booed:
As I left, one sympathizer offered reassurance: "They're just angry because they haven't made much money this year." I thought about another of my slides, one that showed that income of the average American worker (after adjustment for inflation) was lower in 2008 (let alone 2009) than it was in 1999. How many of the attendees could say the same?
This Fed report confirms as much. Now the central bank has a chance to demonstrate that it has learned the lessons of the crisis by decisively exercising its regulatory authority.
-- Tim Fernholz
