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John White singing…

John White, Director of the SEC's Division of Corporation Finance       John White, Director of the SEC's Division of Corporation Finance
Taxpayers will appreciate this... reports...   ~~~ "... All U.S. companies, not just those in finance, should consider limiting compensation packages that reward excessive risk-taking by executives, a senior regulatory official said Tuesday. The comment by John White, director of the Securities and Exchange Commission's division of corporation finance, comes as large executive-pay packages fall under greater scrutiny in the wake of the taxpayer bailout of Wall Street firms. Next year, the SEC will examine the filings of the largest U.S. financial institutions to review disclosures about executive pay as well as annual reports and periodic filings. The stepped-up review will include the nine companies that have agreed to participate in the Treasury Department's equity-injection program, under which taxpayer money will be used to take stakes in the companies...." ~~~~

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A description of the Treasury Department TARP executive comp restrictions... ~~~~ " ...The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury has issued interim final rules for these executive compensation standards.... ~~~~

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This is an excellent effort on the part of the SEC... broadening the regulatory boundaries... I might suggest to Mr. White that he have his staff cast an eye on the guys on Broad Street... because here is what was recently reported in Bloomberg...  ~~~~ "... Blankfein, Cohn, Winkelried and Chief Financial Officer David Viniar, 53, are among the executives whose compensation will be subject to new Treasury-imposed standards, although none of these rules is likely to make a material difference to pay practices at Goldman. While the company won't be able to take tax deductions on salaries exceeding $500,000, bonuses that make up the majority of Goldman executives' pay won't be affected...." ~~~~ The GS folks seem to have the tax deductibility part figured out... but what about the first provision?  "ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;" We all know that VAR is a short term, somewhat discredited measure of risk for a firm doing lots of principal trading... so how would Goldman or Merrill for that matter structure comp for their executives who oversee firm risk on client facing (market making) and proprietary desks? Since often the risks to the institution can lie embedded way past the quarter's end (eg CDS, CDOs, etc, etc, etc...). And the "clawback" provision (#2) ? Now surely that wouldn't apply...

One Comment

  1. cate wrote:

    House’s Frank Calls for `Moratorium’ on Wall Street Bonuses
    By Christine Harper and Alison Vekshin

    Oct. 22 (Bloomberg) — House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.

    “There should be a moratorium on bonuses,” Frank, a Massachusetts Democrat, told reporters yesterday in Washington. “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,” and if it causes losses “you don’t lose anything.”

    The five biggest U.S. securities firms paid out a record $39 billion in bonuses last year even as the credit crisis began to affect investments in mortgage securities and leveraged loans. One of the firms, Lehman Brothers Holdings Inc., went bankrupt this year and two others, Merrill Lynch & Co. and Bear Stearns Cos., were rescued in emergency sales. The two largest firms, Goldman Sachs Group Inc. and Morgan Stanley, became bank holding companies and are receiving $10 billion each of government money.

    The moratorium “ought to be for all firms” and not just for those eligible for the Treasury financial-rescue program, Frank said. The halt on bonus payments should last “until they can get a better structure without that perverse incentive,” he added.

    Wednesday, October 22, 2008 at 12:24 pm | Permalink

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