The Fourteenth Banker Blog

June 22, 2010

Pay Cartels Rule Banks – Overpaid 2

Filed under: Running Commentary — thefourteenthbanker @ 7:16 AM

Adding to yesterday’s comments, banks are run by Pay Cartels.  They buy the myth of superhero financial status, despite the fact that they consistently destroy value at banks.  Any major bank ownership group consists of two classes of owners.  Those that were acquired and had shares of the new institution exchanged for shares of their purchased institution.  And new owners who trade the stock.  The legacy owners consistently get the shaft.  This is because of the pay cartels that rule decision making, taking excessive risk for excessive pay.  The Federal Reserve notes that pay practices have not changed enough.  I can tell you that from what I can tell, the pay philosophy has not changed at all.

The Federal Reserve has completed an initial review of compensation policies at 28 large banks it oversees and has been giving them confidential feedback on areas where they must change. On Monday, the Fed and other federal regulators issued final guidelines, stressing the need for policies that do not give executives, traders, and other bank employees incentives to make overly risky investments that might earn them huge bonuses in the short run while leaving the bank exposed to losses in the long term.

Good work there on the part of the Fed.   Real cutting edge stuff.

At least they are beginning to address the problem.


  1. 14, great pair of posts, stated with the authenticity of someone who knows where these guys really live!

    Take into consideration the massive direct tax breaks some of the allied industry enjoys as well: David Weidner puts some more perspective on this today (links at

    Comment by Lawrence — June 22, 2010 @ 9:08 AM | Reply

  2. Financial types have come to understand the enormous value of creating the Tale of the ideal Superhero in the land of Superman and Batman. ( Compare to the clods in US auto manufacturing) The merchandisers of Elvis and MJ understood that huge profits can be made from Tales of the Super Dooper Hero. It takes surface that magnifies the imaginings of a glitter life to create the necessary awe by the loser masses. This is the successful American wealth genre . The idea was to idealize theft as good. The political master of all this , in political terms, who learned his trade craft from the Hollywood Mogul’s was Reagan.

    Every “red blooded” American likes to win and cannot abide a loser. Losers are the energy source over which one wins to enter the glitterati. The winner needs the appropriate language , dress and physical props to sell the sexual gratification hopes of losers for immense profit. First and foremost, the winner understands that his only tool is risk. The greater the risk, the more heroic the possible merchandising tale for generating personal wealth. The first thing you learn , if you do not have it already, is all is panache with a ruthless drive to take all risks to be a winner. Risk is for gain, loss on that risk is shoved on others because that is what they exist for…. fleecing.

    In the land of tests, there have always been tests, there is a winner and loser. I learned a great lesson around fifth grade when my usual A ( Over 90 %) was reduced to a B when the teacher reduced my grade to a B based on the curve. I was not tested against what I knew for my own learning but was pitted against everyone else. All against all was the lesson of the day.

    These people are only doing what is natural with systemically induced great magnification. The solution is for the losers to smarten up without becoming the ogres. Then , we would be required emphasize commonwealth in the land of personal righteousness. A very tall oder unless the learning is forced by experience.

    At the end of the day are the reformers nothing more than pursuing an angle so they become the glitterati?

    Comment by Jerry J — June 22, 2010 @ 12:43 PM | Reply

    • Jerry,

      I have come to the reluctant conclusion that this –

      >>>>>>The solution is for the losers to smarten up without becoming the ogres. <<<<<<

      can only be answered by the losers realizing that the only thing a bully understands or respects, is a bigger bully.

      Comment by Sandi — June 22, 2010 @ 1:38 PM | Reply

  3. Good grief. … and why has nothing changed? Because the self-same Fed backstopped losses from excessive ‘risk taking’, which in turn, ocurred because our Fed refused to believe in the possibility of fraud in the markets.

    I see little evidence that the basic economic philosophy at the Fed is changing (they’re still counting on a market equilibrium principle that presupposes an ‘Invisible Hand’ and the Efficient Markets Hypothesis, still obsessed with the possibility of inflation (?!), and still myopically focused on inflicting ‘economic discipline’ to balance macro budgets as a solution to a depressed economy.

    As a result, I for one, am not very optimistic that – even though they can identify the problem – the Fed will effectively fix it.

    This is CLASSIC moral hazard working it’s magic. Until we institute some real painful penalties for poor management – like TBTF breakups, and strong and ongoing real-time regulation/enforcement – we’ll continue to play this circular game of pocket pool.

    The current macro-incentives for banks, established by failed economic theories at the Fed, continue to be based on the wishful thinking that banks will act with anything more than a short-term profit focus.

    At best, the banks and the Fed are speaking different languages at each other. At worst, there is collusion to drive banking/political profits/power.

    Comment by Lucy Honeychurch — June 22, 2010 @ 12:53 PM | Reply

  4. “Pay Cartels” … lol … incisive epigram

    Comment by tippygolden — June 22, 2010 @ 6:56 PM | Reply

    • And we are forgetting one impotent figure sitting at the top of the org named Board of Directors!

      Once again why do we have Boards where the buck should stop?

      Have they been reduced to building incestuous relationships and let the management have the free run so long as the pleasure continues, in whatever manner possible?

      Comment by alwaysnaive — June 30, 2010 @ 10:33 AM | Reply

      • Yes! If I understand it correctly the Obama administration killed a measure that would have made it easier to get new director nominees on ballot. Bdo you know anything about that?

        Comment by thefourteenthbanker — June 30, 2010 @ 10:52 AM

  5. […] not be surprising that the Fed just found that compensation practices at financial institutions have barely changed, despite all the talk about linking compensation to […]

    Pingback by captains, masters, and the tyranny of chutzpah | theParetoCommons — June 23, 2010 @ 10:44 PM | Reply

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