The Regulatory Tent
I watched Brian Moynihan, CEO of Bank of America on Morning Joe this morning. I met Brian a few times when he was back running Fleet Bank. He is in Washington to go before Congress with some other bank CEO’s to talk about whether ten years after the financial crisis, banks like Bank of America are still too big to fail. Listening to him discuss the state of the financial services industry and its responsiveness to the needs of the American people brings back lots of memories of my forty years in banking.
Back when Brian was made CEO of Bank of America I figured he would be one of the survivors. He grew up buying small banks for Fleet and then, after Bank of America bought Fleet, he was in the right place at the right time when Ken Lewis stepped down after the dust settled from the financial crisis. He has banking finance in his blood. There were moments in the past decade when I wondered if he had the right stuff, but this morning he has proved to me that he does. He has announced that since Bank of America has recovered so well, he will be raising the bank’s minimum wage to $20/hour. Wow, that’s an enlightened CEO if I’ve ever heard of one. He is leapfrogging the $15/hour minimum wage debate and taking it in the direction all companies need to move. A living wage and income leveling are critical issues in this country and the world.
I will note that this caused me to look up his compensation, which rose to $26.5 million from $23 million over the past year. That means he will make 637 times the lowest paid worker at Bank of America, using the new $20/hour base wage. Put that in perspective. The average CEO multiple is 312X and that is a new high and is considered way out of line. So, Brian gets twice that. Another bit of perspective is before 1990, that multiple was below 100X and in the mid-1970’s it was as low as 40X. At 40X, Brian would be earning $1.7 million, a fair piece of change, but about what an average Managing Director (the new version of a Vice President) earns these days.
If you add to that the fact that marginal tax rates on that income has fallen from 70% in the 1970’s to 39.6% today, you can magnify the value retained of that big compensation number by a few hundred more X’s. I sure hope Brian is putting his money to good use and giving most of it back to the world that so desperately needs it.
If you recall, during the Too Big to Fail days of the financial crisis, there was a great deal of talk about restricting bankers’ compensation. The idea was that any compensation over $500,000 should be deferred, paid in stock, subject to clawbacks or all the above to ensure that bankers were not being induced to take more risk on the backs of taxpayers (ultimately) than what was prudent. The restriction was to last until the banks paid back the capital infusions that the financial crisis was occasioning. That all ended very quickly as banks thrived and repaid the government very quickly.
The truth is that I have decent anecdotal evidence that suggests that the financial crisis did dampen banker compensation overall, which was helpful to banks as well as regulators, since it allowed the banks to rebuild their larders and get back into strong financial shape. In fact, a study done in the UK on the Remuneration Code put in place after the crash, showed that the restrictions helped make bankers less risky and more inclined to respect performance as the measure for their pay.
At a recent lunch with an old banking friend who is closing in on retirement age (a condition shared by virtually all my friends at this stage), he showed me that some regulations never sink in altogether. We were discussing what he wanted to do next. He explained that he was finally taking a sabbatical over the summer, prepared to tell his employer of a decade that he would consider coming back to his existing position or another one when he was done communing with his life. What he hoped was that he would find a position after the sabbatical where he could put bank capital at risk in deals of his finding and doing. I must admit it made me blink when I heard it.
I thought those halcyon days were long gone. Getting paid a big dollar to swing for the fences is really old days banking from the 80’s and 90’s. Not everyone abused the risk parameters in the old days, but it is hard to imagine that taking those sorts of risks is the best thing for the bank regulatory environment. Maybe it is only my old friend hankering for days gone by and such a position is not available in this day and age. I will stay tuned to see where that goes.
I spent the better part of my forty years on Wall Street running businesses and thinking about risk and reward. That’s what everything was about. Looking at risk-adjusted return on capital was everything. Doing business that didn’t require excessive capital was the Holy Grail. Trading on expertise was viewed as for more valuable than just putting risk capital to work. I know that bankers are used to living in a big capital world and I was always aware of the attitude that leveraging the bank’s capital was a great way to get a big bonus, but I also knew that the payout on that needed to be low to account for the future risk that would likely outlive the bonus cycle and most likely outlive the banker that put on the risk as well.
As I think about those hearings in Washington that Brian Moynihan is going off to attend, I just hope that our Congress and the CEO’s on the firing line understand the life under the regulatory tent of institutions allowed to gather capital from others and marshal that capital is rife with people who want to make money on OPM (other people’s money). No people do this more than real estate people. In fact, its why you see such questionable businessmen (oh, say, like Donald Trump) getting access to capital over and over despite showing all the signs of bad shepparding of that capital. I wish there were a better way to ensure that the system wouldn’t revert to its old ways. Maybe Moynihan can get that message across just like he’s trying with the $20/hour minimum wage. Rock on, Brian.