Monday, September 21, 2009

We're fixing the banks! But our battles will go on. Cue the music.

I realize that there are structural difficulties in our society. For example, our love of name recognition all but assures that most incumbent politicians are re-elected over and over and over again. Similarly, anything that a company CEO wants to have done is usually done, and no dissident shareholders can stop a CEO.

Compensation is a big issue, and one that I've looked at before (in connection with the government's attempts to "fix" AIG). But now it's time to look at it again, because the Federal Government will fix the recession by constraining the top bankers.

The Federal Reserve and the Treasury are preparing broad new rules that would force banks to rein in practices that made multimillionaires out of many financial executives during the housing bubble, officials said....

Fed officials would give banks wide leeway in how they structure their rewards. They would not prohibit million-dollar pay packages or address issues of fairness. Rather, the rules are intended to restrict pay plans that encourage reckless behavior by rewarding only short-term gains.

But, for what it's worth, it could be worse:

The effort is also meant to be a credible alternative to the call by some European leaders for specific limits on bonuses to financial executives, an idea opposed by the Obama administration. Officials from Europe and the Treasury are negotiating over compensation and other financial industry regulations in advance of a summit meeting next week in Pittsburgh of leaders from the Group of 20 industrialized and large emerging countries.

The Obama administration opposes strict caps on pay, arguing that the size of the bonuses are not as important as the risk to the financial health of the bank that bonuses linked to performance can create.

But meanwhile, there are also moves in the United States to change the regulatory landscape. Christopher Dodd, Barney Frank, and Barack Obama, however, haven't agreed on the best course of action:

Lawmakers and aides say the bill Mr. Dodd is preparing to make public in the coming weeks would be more ambitious and politically risky than the plan offered by the White House, which considered but then decided against combining the four banking agencies — the Federal Reserve, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the Comptroller of the Currency — into one superagency.

The White House backed away from that plan to avoid a phalanx of industry opposition that might slow Congress.

In the House, Representative Barney Frank of Massachusetts, a Democrat and the chairman of the Financial Services Committee, has been working on legislation that is closer to the Obama plan on consolidation of the agencies.

Mr. Dodd and others say that the market crisis last year was caused in part by banks that were able to choose which agency would regulate them, and by bank agencies that reduced regulations to encourage more banks to choose them.

That problem would be eliminated if there were only one bank agency.

Not necessarily.

The theory behind these consolidation moves is that if we take a bunch of little agencies and combine them into one big agency, that one big agency will move with a single purpose and solve problems.

Bureaucracies don't work that way. George W. Bush's Department of Homeland Security doesn't speak with one voice; all the subagencies and sub-bureaus and sub-departments still fight with each other. The same goes for Jimmy Carter's Department of Education, and every other consolidation that's ever happened.

Let's face it; if you put two offices under the same manager, you're still going to have two offices. And no matter how many videoconferences and Twitter accounts and the like you have, the New York people are still going to think of the Los Angeles people as "them," and vice versa.

There's a famous phrase, "rearranging the deck chairs on the Titanic." According to Andrew, this phrase originated with Rogers Morton, and referred to the fact that Ronald Reagan had won a string of primaries against Morton's boss, President Gerald Ford. Ford eventually won the nomination, but it can be argued that Reagan lost it rather than Ford winning it; even in the 1970s, when political purity took a back seat to survival, a Reagan-Schweiker ticket still troubled many.

So I have no illusions that a superagency will solve things. In fact, since regulatory agencies are often captured by those who are being regulated by the agency, there's a good chance that a banking regulation superagency will do the bankers' bidding anyway.

But I guess it looks really important.
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