Francis Chung/POLITICO via AP Images
Senate Banking Committee chair Sherrod Brown (D-OH) and ranking member Tim Scott (R-SC) preside over a hearing on Capitol Hill, March 7, 2023.
Today, the Senate Banking Committee meets for a relatively rare event: a legislative markup. It’s actually the first legislative markup under committee chair Sen. Sherrod Brown (D-OH), who took over the gavel in 2021. (There have been several dozen nomination markups, but nothing for legislation.)
Senate committees in general reserve markups for legislation that can pass, and the Recovering Executive Compensation Obtained from Unaccountable Practices (RECOUP) Act, a joint measure from Brown and the committee’s ranking Republican, Sen. Tim Scott (R-SC), is that kind of bill. It seeks to hold executives who bankrupt their companies more accountable, empowering the Federal Deposit Insurance Corporation (FDIC) to claw back compensation, remove executives from their positions and the industry at large, and impose civil penalties. The legislation follows the collapse this spring of Silicon Valley Bank and other large regionals that failed to manage interest-rate risk.
In March, President Biden called for more authority along these lines to punish failed bank executives. “The aim is to both hold executives accountable for their failures and to put in place a comprehensive set of policies to prevent future failures of risk management and governance from happening in the first place,” said Alysa James, communications director for the Senate Banking Committee.
However, that was also the aim of a bill released three months ago by Sen. Elizabeth Warren (D-MA) called the Failed Bank Executives Clawback Act. Like the RECOUP Act, the Warren bill has bipartisan support, including from three Republicans on the Banking Committee—Sens. J.D. Vance (R-OH), Katie Britt (R-AL), and Kevin Cramer (R-ND)—along with two other Senate Republicans, Missouri’s Josh Hawley and Indiana’s Mike Braun. While the two bills are similar, Warren believes hers is stronger in several key provisions, telling Politico last week that it “represents the toughest proposal in Congress to ensure failed executives who blow up their banks don’t walk off with huge bonuses.”
The Warren bill had ten co-sponsors on the committee, one vote shy of a majority. By adding his endorsement, Brown, a progressive with a clear interest in cracking down on executive compensation for failed bankers, would have a ready-made, aggressive, bipartisan effort close to the Republican support needed for passage. Instead, he preempted that by partnering with Scott on their own bill, which has been described as watered down.
Negotiations have been engaged since last week, attempting to reconcile the two approaches. Warren has filed amendments on aspects of her bill, and James confirmed that amendments will be considered at the markup today. Whether the Brown-Scott package will maintain the same degree of support on both sides of the aisle remains to be seen.
The politics are critical here. Clawing back bonuses and stock options from bankers who crash their companies and harm the economy is a populist concept for a senator seeking re-election in a red state. It works as well for Scott, the only senator seeking the presidential nomination this year. But those same dynamics cut against the wishes of the banking lobby, an enormous source of campaign cash.
That could account for the multiple differences between Brown-Scott and the Warren bill. First and foremost, the Warren bill would require the FDIC to claw back all or part of the compensation they received over a three-year period before a bank failure; Brown-Scott makes it discretionary. (It also gives bank boards of directors the discretion to claw back compensation.) James explained that there may be some cases where the cost of litigation would exceed the executive compensation that would be recovered, or where banks fail due to local economic conditions rather than misconduct. “We don’t want to tie regulators’ hands,” she said.
Clawing back bonuses and stock options from bankers who crash their companies and harm the economy is a populist concept for a senator seeking re-election in a red state.
But a discretionary measure prohibiting bank compensation tied to inappropriate risks has spent 13 years in dry dock, with regulators simply not writing the rule. That argues for mandatory clawbacks, to take the guesswork from potentially captured agencies out of it. As I wrote in March, “Time and again, we have seen the regulators who sit closest to the bank and executive lobbies simply slow-walk these kinds of proposals to death.”
Warren initially let regulators claw back five years’ worth of executive compensation; to get other Republicans on board, she dropped it to three. Brown-Scott reduces that further to two. Given that House Republicans may want to cut that even further, supporters of the Warren bill believe Brown gave away too much. Brown’s office said they needed a shorter lookback to maximize bipartisan support.
While most executive compensation comes from bonuses and stock options, Brown-Scott omits salary as a form of compensation that can be clawed back. Silicon Valley Bank CEO Greg Becker made a little over $1 million in base salary last year, out of his $9.9 million in total compensation.
Brown-Scott does allow regulators to impose civil money penalties on executives who “recklessly” violate the law, breach fiduciary duty, or violate safety and soundness practices at their bank. Civil money penalties are already an option for the FDIC, but the bill increases the maximum.
Finally, Brown-Scott has a narrower definition of who can have their compensation clawed back; it includes C-suite executives and those who perform those functions, “anyone with management authority over the operations and governance of the bank,” according to James. But the Warren bill applies to members of the board of directors, controlling outside shareholders, “and other high-level persons involved in decision-making.” In both bills, executives at community banks with less than $10 billion in assets are exempted.
None of this is to say Brown-Scott is a bad bill. An analysis from D.C. corporate law firm Davis Polk obtained from a source laments that it “would have major consequences for corporate governance at all banking organizations over $10bn in assets not just those that fail.” This is a vintage whine about “accountability standards” that would need to be written into company bylaws. A similar provision in the post-Enron Sarbanes-Oxley law that requires top officers of public companies to attest to proper risk controls has done little to change corporate behavior. The freakout that Brown-Scott would “federalize corporate governance” does show, of course, how angry bank lobbyists get at the slightest attempt to force some accountability on corporate America.
But the details matter for how many bank officials could be subject to clawbacks, how much compensation will be captured, and even whether the clawbacks will happen at all. On the surface, however, stakeholders are papering over these differences. Natalia Renta, a senior policy counsel for Americans for Financial Reform, one of the more prominent voices in the financial reform debate, said in a statement, “There is now bipartisan momentum to pass legislation to hold executives more accountable when Wall Street takes outsized risks that pay off for executives but not the rest of us.”
Amusingly, there is yet another bipartisan clawback bill, an effort between Sens. Jack Reed (D-RI) and Chuck Grassley (R-IA). But Reed praised the Brown-Scott compromise, as did Sen. Robert Menendez (D-NJ), who endorsed the Warren bill. Elsewhere, Menendez has said that the “essence” of the Warren bill would have to be part of Brown-Scott.
Brown’s argument is that their bill encompasses more issues, including the ability to remove failed bank executives from the industry (which already exists; in Brown-Scott, the legal standard is lowered slightly), allows boards to claw back compensation, and strengthens civil penalties. “The RECOUP Act is the most comprehensive proposed response to recent bank failures,” James said.
You often hear the refrain that in policy, we can’t let the perfect be the enemy of the good. But it’s unclear which is which here. Warren had five Republicans on board for what is, at least in some aspects, a stronger policy. That seemed like a reasonable platform to reach at least 60 Senate votes, and also prepare for combat with House Republicans, who would presumably try to roll the Senate bill back.
It’s possible that some of the Republicans on board for a clawback bill would revolt against a weaker product. Hawley expressed concerns to Politico about a watered-down bill, and suggested that he would try to pass the bill he sponsored on the Senate floor. Vance also wondered why the Warren bill wasn’t taken as the bipartisan baseline. (UPDATE: It should be noted that Vance has already endorsed an opponent to Brown in next year’s Senate election.)
Scott called his bill with Brown a “commonsense solution … tailored to protect the American taxpayer and limit government overreach.” Sources working on the bill expressed mild frustration to the Prospect that Brown would elevate Scott in the middle of a presidential campaign.
But the bigger issue is that Warren’s bill did the work of building a consensus for action, and Brown then substituted his own bill for it. If the details of what comes out of today’s markup are strong—for a bill that could certainly pass Congress and get President Biden’s signature—that will just be an inside baseball story. But if it’s notably weaker, questions about this maneuver will grow.
