Treasury Secretary Tim Geithner will try to cut down on risky behavior by financial institutions by asking them to tie bonuses to the long-term health of the company rather than short-term gains, according to people briefed on his plans.
As part of a broad financial-regulatory plan to be unveiled this week, the administration wants to put in place reforms to get financial incentives for employees closer in line with the long-term health of the company. Basically, it’s what bonuses used to be before Wall Street went wild in recent years.
Long before the recent focus on AIG bonuses, the administration was looking at how risky behavior in the financial system was driven in part by incentives for executives to take risky bets for a quick return.
But President Obama has no plan to try to cap bonuses, according to the people who were briefed. The administration said it simply plans to update regulations, not control what people are paid.
The mechanisms could include increased disclosure, increased oversight or a bigger role for risk managers in the company.
The executive-compensation recommendations are part of the hotly anticipated financial-regulatory package that Geithner will present Thursday before House Financial Services Committee Chairman Barney Frank (D-Mass.) as part of a hearing called “Addressing the Need for Comprehensive Regulatory Reform.”
On Monday, the Wall Street Journal reported that Geithner planned: “An enhanced role for the Federal Reserve to monitor and address broad economic risks … Changes to the way banks are overseen to prevent lenders from shopping among regulators for the easiest supervision. … More transparency and stricter rules for the way money flows between banks. … Tougher capital requirements for big banks … Consolidation of consumer-protection enforcement.”
The biggest part of the secretary’s plan, and also a priority for Frank, is greater control over systemic risk: updating regulations to reflect the current reality that it’s not just banks that dominate the financial system, but also insurance companies and hedge funds. The government had no controlling authority to wind down collapsing insurance giant AIG because it’s not a bank.
As part of the package, the administration is looking at risk-taking, since recklessness—much of it involving hedge funds and derivatives—got the country into the current economic mess.