Executive Compensation: Updates

Brief on my own forty-two cents this go-'round, but heavy on the inbox house-cleaning ...

Backdating

Juniper Networks settled a shareholder derivative suit for $169 million. This is the third largest settlement for such suits (United Health at $900 million, Comverse at $225 million, followed by fourt-place Broadcom at $160 million). Speaking of Broadcom, while the SEC dropped its litigation against several Broadcom execs and general counsel, legal analysts have chastised the company for capitulating to shareholders due to "litigation fatigue."

Business Bankruptcy

Recently U.S. Bankruptcy Judge Kevin Carey approved one of several compensation proposals submitted by the Tribune Company (think Chicago Tribune and LATimes). Objections were filed to the plan, but the Judge found 11% of the company's 2009 cash flow as apportioned to 720 managers in bonuses "incentiv[izing]". A little tongue-in-check there, but it amounts to $45.6 million in manager bonuses.

Bank of America (BofA)

Let's start with the uncontroversial: formerly of Merrill Lynch, John Thain finally found work. As a fellow job seeker, *yay* John.

The Cuomo complaint is making the rounds: allegations that BofA and outside counsel Wachtell had in fact agreed to disclose 4Q08 Merrill losses, but the decision was reversed later by Mayopoulos alone; Wachtell "marginialized." Allegations also include Mayopoulos being fed inaccurate information by BofA executives regarding the losses (and therefore affecting his judgment as regards disclosure).

And so it's no suprirse then, that S.D.N.Y Judge Rakoff has not only refused to approve the newly proposed $150 million settlement, but gave SEC counsel a hard time over why NYAG Cuomo's complaint is different, and has recently asked for ALL discovery materials regarding BofA's former general counsel Mayopoulos' dismissal.

Oh, and if any of this behaviour suggests that a substantial bonus payment to various BofA employees would be a PR nightmare, you apparently would be wrong: $4.4 billion goes out to Ibanking employees for their 2009 performance (that's an average bonus of $400,000 per person). Though in fairness: those who are receiving larger bonuses will receive stocks vesting over a several year period.

Compensation Czar

So AIG paid-out contractually agreed to bonuses this year, and the whole of D.C. is trying to determine how to stop it.

Pay Practices

But AIG has heard enough of the populist outcry, and so re-jiggered its pay practices. Analysts and commentators still suggest the jiggering will not satisfy regulators.

Barclay's also tweaked their pay packages and structures. The President and Chief Executive waived their 2009 bonuses; other executives' compensation was deferred and other bonuses were paid in stock.

Mr. Blankfein at Goldman, however, took a $9 million all stock bonus for 2009. The bonus is considered conservative, as Blankfein took a $67.9 million bonus in 2007. No "magic formula" apparently.

Re-Regulation

The Administration's banking plan has Wall St. upset, mostly because cash cow proprietary trading is on the chopping block. Paul Volcker has been quite clear: either have access to federal backing or continue the proprietary trading.

It is little wonder lobbying efforts are up. Is "up" a dimunitive term here? FWIW: Former Treasury Secretary Henry Paulson doesn't like the plan.

The Administration's bank plan also contains disincentives for banks that grow too large to fail. On this theme: JPMorgan got a little bit bigger recently, and then one of its Athens' offices was bombed.

Recall rampant media discussion about the Webb-Boxer Taxpayer Fairness Act - the "Jobs Bill?" A banker tax may be included among the amended provisions. Proposed as a windfall bonus tax, the first $400,000 is exempt.

Separately, Senator Dodd's bank reform legislation has an impasse to overcome ...


Photo credit: Oliviadei.

The Obama Administration’s Proposed Bank Plan; the “Volcker Rule”

Am l-o-v-i-n-g the headlines this morning.

“Asian Markets Drop after Wall Street Reacts to President Obama’s Bank Limits”

“FOREX – Dollar Falls on Obama Bank Plans, Yen Pares Gains”

“India Rupee Has Worst Week Since October on Obama Bank Plan”

Overreact much? For months now, think tanks and paid consultancies have identified several core reasons for the Fall 2008 economic meltdown. Ubiquitously crucial among which has been the ideas: that large organizations which threaten systemic failure with their own should be avoided, and that excessive risk-taking carries costs not immediately identifiable and therefore also should be limited. So yesterday the Obama Administration revealed - an albeit ambitious plan - to address both of those issues, and the market drops to the floor like a petulant toddler. Give me a break already; we have all known that change would come to market mechanisms. The banking industry is a vital and innovative engine for capital generation in this country and around the world; but this also makes it a key member of our shared community, and the hissy fit being thrown in response to being called to responsibility is a little much.

A look at what the bank plan in fact entails. The Administration, purportedly purposely, has left a wide berth for Congress to determine how to effectuate the plan. The core principles are quite clear, however: banking actors are made to choose between traditional banking activities or trading. The choice is forced as, under the plan, any bank that either takes consumer deposits that are federally insured, or otherwise has access to Federal Reserve funds, is prohibited from owning or investing or sponsoring a hedge fund or private equity firm. Banks will be prohibited from trading with their own money; proprietary trading. Administration officials yesterday did say, however, that banks would be able to use their capital to hedge a client’s trade. The intent of the bank plan is to prohibit any trading that is not in the pursuit of servicing a client. There is some ambiguity in the plan as to what “proprietary trading” entails (expect to see a variety of different definitions – and costs to the banking sector – pop up in the news over the next several days).

Separately, the bank plan also tweaks existing rules limiting how large any bank can grow. Currently, no bank can merge or acquire a second bank if the transaction produces an entity that has more than 10% of American deposits. Under the bank plan, deposits would only be one type of funding considered in reaching the 10% ceiling (Ie., short term funding acquired through the market is also proposed as a consideration).

It is expected foreign banks with significant American operations will be pulled into compliance.

Nothing is really ever as simple as all of that, but to boil the plan to the core, you basically have it. The market understands this – hence the hissy fit – because limiting activities is reasonably suspected to seriously constrict profits. (And while the safety afforded by a federal funding buttress is attractive, the real money in banking is in the trading.)

Smells like Glass-Steagall though, right? (Over simplified explanation: different market rules are enforced for different types of investment vehicles [collectively creating a number of different “buckets”], and buckets are not to be mixed.) “No” was the official buzzword from Administration officials throughout the day in response to that question. To be frank, I am too unfamiliar with the Glass-Steagall provisions to speculate, but I am certain there will (also) be plenty of punditry in the next several days that will make analogies and comparisons.

Early analysis has identified some risks to the proposal. The first, that the risky behavior prohibited will be eliminated from the banking industry, but will re-appear in non-financial institutions. Thus eliminating banking risk, but not eliminating the systemic risk. Another risk suggested is that banks, in an effort to make-up for the lost profit, will expand their lending guidelines and threaten the federal funding buttress with too many risky debtors. Relatedly, one of the bigger criticisms has been that the bank plan would not have prevented the Fall 2008 crisis: IBanks Bear Stearns and Lehman Brothers were not commercial banks.

The bank plan now goes to Congress for the House and Senate to pass their own draft legislation. The President's remarks are available here. The plan is in the news everywhere, including Bloomberg, the NYTimes, and the WSJ.

Photo credit: Klip at Wikimedia.

Executive Compensation Re-Regulation: Congress, the Federal Reserve, and the Securities and Exchange Commission

A team I have been working with just fed updates on a research document to some journals >> I scored a new section on executive compensation re-regulation! Each piece of re-regulation described below focuses on localized risk reducing initiatives in the name of the greater financial system.

Congress

The Corporate and Financial Institutional Compensation Fairness Act of 2009. Introduced by Representative Barney Frank (D-MA) in July, and out of Committee and the House Floor that same month. It is currently sitting in the Senate Committee on Banking, Housing, and Urban Affairs. (Most of the commentary I read suggested it would be dealt with there in the Fall of 2009, however …).

The bill amends the '34 Act to give shareholders a nonbinding advisory vote on all issues of executive compensation. Interesting trick here: institutional investment managers that cast such votes are required to publicly disclose how they voted – each year. There is also some discussion about compensation committee members – rules preventing conflicts of interest (so a prohibition on taking any sort of consulting or advisory fees from the issuer). Second interesting trick: the bill directs nearly a dozen federal regulators to formally convene and create new compensation and disclosure rules. One piece of construction guidance offered in the bill: individuals' specific income should not be disclosed. There you go, Tea Partiers. Here is the text of the bill.

The Federal Reserve ("Fed")

The Fed has issued Proposed Guidance on Sound Incentive Compensation Practices. I was deceived when I first opened the Federal Register; it sounded aspirational, at best. On the contrary – I counted the number of times the Fed threatened a poor supervisory rating or an enforcement action for failing to remedy a deficiency - twice - and the number of times the Fed directed immediate effort by banking organizations to come into compliance – three.

Every banking organization under the Fed's supervision is required to come into compliance with the guidance. The guidance is applicable to both executive employees and lower-level employees; it is more targeted towards any employee whose work responsibilities expose the employer bank organization – and again, the larger financial banking system as a whole – to risk. Interesting here: rather than establishing one rule for twenty different types of banking organizations, the guidance states several principles the Fed wants all of the banking organizations to come into compliance with; how any one bank abides by the principles is self-determined. The principles focus on managing the relationship between incentive compensation and employee risk-taking. Broadly, incentive packages should not encourage employees to risk-take beyond the employer banking organization's internal ability to identify, manage, and support that risk. As a means of collecting best practices (maybe a structural means of pushing compliance?), the Fed has created a scheme to supervise compliance. There are two tracks: one for large complex banking organizations ("LCBOs") and a second for smaller, less structurally complicated banking organizations. LCBOs are expected to offer a compensation plan to the Fed; smaller organizations will be assessed on compliance as a part of their annual risk examination process. You can read the text of the Fed's guidance in the Federal Register here.

The Securities and Exchange Commission ("SEC")

In an effort to better enable investors trying to identify the internal risk assumption and reward of a company, the SEC has adopted amendments regarding the disclosure of all employees' compensation. The new disclosure rules are effective February 28, 2010.

Companies are expected to disclose compensation practices that create the risk of a "reasonably likely" "material adverse" effect on the company. Companies are in fact to list situations occurring with their pay practices and among their employees that illustrate when a compensation practice does in fact create a "reasonably likely" risk of "material adverse" effect. (It appears there was a give-and-take during the comment period on the language.) Stef commentary on the effectiveness of the forthcoming disclosure: the list is explicitly non-exhaustive … The disclosure will be made in a new paragraph in Item 402 of Regulation S-K.

Also as regards company disclosure of stock and option grants in the Summary Compensation and Director Compensation Table – use the aggregate fair value grant date and footnote performance awards to disclose an award's maximum value.

(The SEC also voted to approve amendments: creating greater transparency for investors in determining conflicts of interest as regards compensation consultants; and a variety of disclosures regarding the board of directors, as regards nominee and director qualifications, the board's diversity, and the board's structural leadership.)

The final version of the SEC's amendments can be found here.

Image credit: SEC.

UPDATE: executive compensation, corporate governance, and securities

I am so tired I want to scratch my eyes out. And so in lieu of going blind, I am only posting updates of some of what has transpired over the last two weeks regarding some of my pet issues. FWIW - presented here briefly to bring this blawg up-to-date. Thanks - have a *Great* New Year's!!

Bank of America

So with only two weeks left in the year, and right after they repaid their federal funding, BofA chose a new CEO ... who knew it would be the same guy who had a hand in the way the Merrill merger closed and who did not impress Congress while testifying about it. Oh, and FYI: the SEC has broadened its investigation.

Bank Closings

We're now up to 140 banks the FDIC has closed in 2009 alone. Good times.

Banker Bonuses

France follows the U.K. and levies a hefty tax on banker bonuses. Some call it "unfair."

Goldman is a veritable money machine, but there are rumblings inside that the "ethos" has changed ... which is largely of no importance to the demonstrators on the street who still want to see the firm burn.

Outgoing Morgan Stanley CEO John Mack has, for the third year in a row, rejected his year-end bonus. He noted the "unprecedented environment" and "extraordinary financial support" the federal government has used to buttress the banking industry. Morgan Stanley itself is modifying its compensation structure; nothing is definite yet, but rumour is that nearly 2/3rds of executives' pay will come in the form of stocks and will be subject to a clawback provision.

And whether you needed a rumour to confirm it: that all important meeting between banking heads and the President was more show than anything else. From whose perspective, I wonder ...

Compensation Czar

Citi Group and Wells Fargo got out from under TARP restrictions, including Kenneth Feinberg's executive compensation rulings. Good week for Citi - they also got a tax break.

It was announced just yesterday that GMAC will receive several billion more in federal funding.

And just as we learn about the inner turmoil AIG faced as it melted, we shouldn't be surprised bonuses promised to NYAG Cuomo to be be repaid are slow in materializing ... Oh, and Feinberg's recent rulings were modified in light of some fits thrown at AIG.

Re-regulation

The ABA is out to destroy it.

Barney Frank's Wall Street reform package includes significant regulation of the credit rating agencies, including offering investors the explicit right to sue the agencies.

Stock Option Backdating

Broadcom criminal suits are dismissed; all three. Just today, then, Broadcom antes up to settle outstanding shareholder suits.

Similarly, Comverse settles for a record amount, represented by our favorite counsel du jour, Wachtell.

"Wake-Up Gentleman," warns Volcker to Bankers

Whoa. Those are strong words. But I guess if Paul Volcker can't say it – Fed Chairman for years 1979 through 1986 - then I guess there are few others who can.

The WSJ organized a Future of Finance Initiative conference yesterday that brought various bankers and regulators together to discuss reform measures. The Times Online ran a great article this morning with some of the more intriguing quotes. Volcker's "wake-up" statement was in response to a discussion on executive pay, calling the bankers' response to the issue "inadequate."

Also quoted was Sir Deryck Maughan, partner in the private equity firm Kohlberg Kravis Roberts. Maughan focused on the modeling behind the financial instruments, suggesting Wall Street has not "faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors."

(As a side note, there was also an influential Baroness – and advisor to the G20 and Britain's Gordon Brown – who attended the conference and is quoted by the Financial Times. It's like a lunch meeting of an elite group of financial super heros or something.)

The George Soros was evidently also in attendance, and in fact spoke about banning credit default swaps ("CDS"), describing them as "toxic."

This stuff is great fodder for the imagination; please check the Times Online for its report.

SEC Shareholder Director Nomination Proposal: Rule 14a-11

I’ve actually had this post in outline form on my desktop for weeks now …Thank god for Thanksgiving and down-time!

The Securities and Exchange Commission (“SEC”) deferred its decision to expand shareholder (“s/h”) board nomination rights until 2010. Chairwoman Shapiro wanted to review the hundreds of comments that were submitted regarding the proposal. Recall the comment period elicited joint letters from both sides of the aisle, BigLaw defense and plaintiff securities firms.

The proposal is available here, and I wanted to share some of what I read (not ironically, what has generated the most discussion). Broadly speaking, the proposal would allow shareholders greater access to a company’s board. Specifically, the SEC proposes a new rule, Exchange Act Rule 14a-11, that would require a company to include in its proxy materials shareholder nominees for director. Any state law, articles of incorporation, or corporate by-laws that disallow shareholders to nominate directors would supersede the proposed rule. The rule is not intended to apply to shareholders seeking either control of the company or possession of “more than a limited number” of director seats. Refer infra. discussion for clarification of what “more than a limited number ” means.

The SEC theme is fortifying existing shareholder rights. Proposed rule 14a-11, for example, is to remedy what the SEC identifies as an obstacle to a s/h’s right to nominate and elect the board of directors. That being, shareholder nominees float the expense to present their nomination to the shareholders at large for purposes of voting. Board nominees, on the other hand, are simply listed in the company’s proxy materials, and therefore do not have to finance the expense.

Ownership Floors

In an effort to address contra arguments (cost and disruption to the company), the SEC has proposed an eligibility requirement to leverage 14a-11. There is a minimum ownership threshold that must be met by the nominating shareholder or the shareholder group (“shareholder(s)"). The breakdown:

∙ 1% - For large accelerated filers, and registered investment companies with net assets of $700 million or more (company type and size, as defined in Exchange Act Rule 12b2).
∙ 3% - For accelerated filers, and registered investment companies with assets between $75 million and $700 million.
∙ 5% - For non-accelerated filers, and registered investment companies with assets less than $75 million.

These percentages are beneficial ownership as of the time of s/h notice of the vote, and as a percentage of the company’s securities entitled to be voted on at the time of the vote. Further, shareholder(s) must have owned the shares for a minimum of one year preceding the notice, and intend to continue to do so up until the vote in fact occurs.

Disclosures to SEC

Shareholder(s) must also provide notice to the SEC of their intention to include a nominee in the company’s proxy materials; Schedule 14N. This same disclosure would also be made to the company, and is manifold. It contains information such as the percentage of securities held by the nominating shareholder(s), the length of the ownership and the intent to continue to hold the securities until the vote, as well as “certification” that the shareholder(s) do not intend to change control of the company or obtain “more than a limited number” of seats.

Nominating shareholder(s) would also attest that the nominee satisfies standards of director independence as required by a national securities exchange or association, or for a registered investment company, that the nominee was not an “interested person” per § 2(a)(19) of the Investment Company Act.

Further, nominating shareholder(s) would attest that there is no agreement between the nominating group and the company as regards the nominee (Ie., once elected, the director would block certain issues from moving forward). Unsuccessful negotiations with the nominating committee of the company to have the candidate included on the company's proxy card as a management nominee, or negotiations regarding disclosure of the shareholder nominee, do not count.

“More than a limited number”

This limited number is either one nominee, or a quarter of the total possible director positions on a board; whichever is greater. If shareholder(s) successfully nominate and elect 25% of a board’s directors, and those directors' terms overlap with the next nomination and election process, the company is not required to include any further shareholder nominees in the impending proxy materials (so as to avoid greater than 25% of the board being composed of shareholder nominees). Further – as regards which shareholders’ nominees will get priority – first in line is first in time. 14a-11(d)(3).

Closing

As a threshold matter, inclusion of shareholder(s) nominee in the company’s proxy materials would not prohibit other solicitation materials that currently exist and are proper (SEC Ie., a website).

Since an SEC decision on the matter has been deferred until 2010, if approved, Rule 14a-11 would not be applicable during the 2010 proxy season.

View full post and comment string ...

The alleged exodus of talent in light of Czar Feinberg's rulings

If I saw some mass exodus, which I do not anticipate, that would require me to
rethink some of the basic assumptions that have entered into my determinations.

Kenneth Feinberg, Monday's Reuters Conference. This blawg's discussion of Feinberg as Compensation Czar is here.

The Senate and Dodd release their own version of Financial Reform

The text of the draft legislation is here. I haven't read it yet, but can summarize some of the provisions receiving the most (negative?) attention.

Single Banking Regulator, Financial Institutions Regulatory Administration. Created from combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision. All banking regulation is pulled under this new group; hat-tip to controversy: at the cost of the FDIC and the Fed. (Though with one hand he taketh, with the other hand he giveth: FDIC gets to take-over and break-up failing financial companies). No state agencies would any longer have banking regulatory authority and thrifts would in fact have to become banks.

Fed is Reorganized. Specifically, Fed ability to make emergency loans to companies is curtailed, and bank and consumer protection supervision is taken away and relocated elsewhere in the federal hierarchy. Further, where private bankers currently choose six of the nine directors on each of the twelve regional bank boards, Dodd's draft legislation proposes to give this power to the Federal Reserve Board in D.C. Dodd would also give the President the power to nominate Chairmen for the regional bank boards, subject to Senate confirmation.

Council of Regulators. These folks would monitor (and presumably takes steps to remedy?) systemic risks.

Consumer Financial Protection Agency. At last - something Everyone can agree on? Will cover consumer products including credit cards and mortgages.

"Too big to fail institutions." Once identified, regulators could require a company to shed divisions and components to reduce size.

A federal insurance regulator is created; derivatives go to an exchange; rating agency liability is increased; parties selling ABS would be required to retain partial ownership; and shareholder voice is given a new, higher platform (as regards governance issues broadly, and executive compensation specifically).

It's early in the game, and House and Administration reform look very different; is difficult to say what of any of this will remain by next year at this time.

News Index: last week and a half of re-regulation and executive compensation

Because I promised (a week ago), but wanted to follow-through: here is a quick index of the various posts I published on the last week or so of re-regulation and executive compensation news. Thanks!

• Bank of America ("BofA") news here (outside counsel playing fast-and-loose?), here (unlicensed inside counsel), and here (no one wants Lewis' job).
• The Consumer Financial Protection Agency ("CFPA") made it out of two House Committees and is closer to a House floor vote. Here.
• Kenneth Feinberg released his first set of rulings on executive compensation proposals. Here.
• The Financial Stability and Improvement Act of 2009 (otherwise known as legislation for 'too big to fail institutions') was introduced and debated. Here.
• The Investor Protection Act of 2009 was voted out of House Committee and is on its way to the House floor for a vote. Here.
• Treasury released new rules on executive compensation, and is soliciting comment letters on its proposal. Here.

Legislation on derivatives also made it out of House Committee, but I would like to postpone a post on that until later this month. Thanks!

Consumer Financial Protection Agency ("CFPA") – what's inside?

So the Consumer Financial Protection Agency ("CFPA") made it out of two House Committees last week: the Financial Services Committee and the Energy and Commerce Committee. I have blawgged before about what the legislation entailed, but that was when it was first proposed by the Administration over the summer. I wanted to follow-up with a review of what the bill looks like coming out of the Committees (and onto the House floor for a vote) (though note, early Senate sentiment is not looking too keen).

No plain vanilla provision. Let's review. At its most basic level, the vanilla provision required private financial companies to offer a standard version of whatever financial product they offered. So if for example, a private company offered consumers credit cards: the federal government would create a very basic, easily understood credit card product that the private financial company would be required to offer alongside any sophisticated credit card product.

Actors exempt from CFPA oversight include: banks with assets of $10 billion or less; insurers (ie. mortgage or title insurance); attorneys, accountants, real estate brokers, cable companies, and auto dealers. So the last few make sense, keep in mind that the intent of the CFPA is to rein in predatory credit lending and credit related products.

Watt-Moore Amendment. Recall that the legislation was originally going to allow co-regulation by federal and state regulators over the private financial actors. The battle has been lost, however: current language allows for the Comptroller of the Currency to override state laws if they interfere with federal regulation. Your guess is as good as mine as to what that means (though my money is on federal pre-emption continuing unabated).

Also recall that over the summer the CFPA was proposed as an enormous umbrella capacity for regulating all things related to consumer financial products >> taking regulatory authority from existing federal agencies, and pooling it under the auspices of the CFPA. Some of that made it out of Committee: the Federal Trade Commission (FTC) has lost oversight of the consumer credit rating agencies to the CFPA.

Financial Stability and Improvement Act of 2009

The Financial Stability and Improvement Act of 2009, otherwise known as draft legislation for the “Too Big Too Fail” institutions, was proudly unveiled last week by Treasury and the House Financial Services Committee. Here’s the meat of what it proposes:

Creation of another (?!) Council, this one the Financial Services Oversight Council, which first identifies financial companies and activities that pose a threat to systemic stability, and then monitors them. No really – without other elaboration as to how to identify or effectively achieve any of that, this is what the draft legislation proposes. This Council, evidently, has a massive data-gathering responsibility (data generated by various federal financial agencies), and has the ability to name concerns for federal action.

A fairly aggressive approach to holding company regulation. Specifically, the draft legislation removes Gramm-Leach-Bliley Act restrictions on federal power (specifically, this would allow various federal agencies to regulate). Background: Gramm-Leach-Bliley, alternatively known as the Financial Services Modernization Act of 1999, rolled back Glass-Steagall (1933) in part. But a big part. Glass-Steagull said investment banks are investment banks, and commercial banks are commercial banks, and insurance companies – very big surprise – are insurance companies >> keep your buckets separate. Gramm-Leach-Bliley, among other things, allowed these separate actors to consolidate. So one bank could offer all variety of financial services, and voila, usher in the dawn of the financial service industry.

• Following presumed enactment, no further commercial companies will be allowed to own banks, industrial loan companies ("ILCs"), or any specialty bank charters.
• Thrift holding companies would be subject to fed supervision, and such charters would be reserved for entities focused on mortgage lending.

The draft legislation has a very federal bankruptcy code-type idea. The draft legislation contains language that provides for wind-down activities. Specifically, “that shareholders and unsecured creditors bear the losses, not taxpayers.” The draft legislation delegates the FDIC with this wind-down responsibility, and costs are to be provided for by the failed company (presumably priority above the creditors; *yay* lawyer drafters). VERY INTERESTING: if the company actually does not have enough money to wind-down, a “Resolution Fund” will pay the deficit. This fund is created by “assessments on all large financial firms” (later defined as companies with assets of $10 billion or more).

Not as interesting: there are new organization models; ie., the Treasury Secretary must approve any Fed effort to provide liquidity; and banking regulators and the SEC have to come together to write rules requiring creditors (or securitizers where the loan was not originated by the creditor) to retain 5-10+ percent of any credit risk associated with loans for securitization (is it me, or was that the rule right there?).

Investor Protection Act of 2009

Because last week was hot for re-regulation, I promised a summary of what I saw. So here goes ...

The Investor Protection Act of 2009 was proposed by Treasury in July, and will probably be voted out of the House Committee on Financial Services this week for a House floor vote later this fall. Some of the more rockstar aspects of this bill include:

Should advisers and broker-dealers owe the same fiduciary duty to investors? Currently, investment advisers must act in the best interests of the client; broker-dealers, on the other hand, are only legally required to provide a suitable product for investment. Keep in mind the distinction here: investment advisers offer financial advice to individuals or asset management to funds or corporations; broker-dealers actually trade shares to benefit their own accounts (whether as an agent for a client or as a principal on their own behalf).

The bill creates new SEC powers, in two ways. First, it amends the Investment Company Act of 1940 to require mutual funds to disclose more information to investors. Second, the bill also creates an Investor Advisory Committee that represents investor interests within the SEC.

Also-also: there are whistle-blower provisions that offer protections and compensations; and investment advisory firms with assets of less than $100 million will forthwith be regulated by state securities agencies.

UPDATE (11.05.2009, 145p): The legislation was voted out of Committee yesterday (11/04) and is headed to the House floor for a vote. Controversial meat on that bone is the Garrett-Adler amendment that was successfully attached to the bill. The amendment permanently exempts small businesses from a requirement that outside auditors review a company's internal control and environment (as regards issues of accounting, fraud, and waste). Small business is defined as companies with a market value less than $75 million. This will exempt approximately half of all publicly-traded companies. Brief background: the outside auditor requirement exists as part of the post-Enron Sarbanes-Oxley ("SOX") regulation. Historically, smaller firms have been exempted from the auditor requirement due to cost concerns.

BREAKING: Treasury released rules on compensation rules

I was - literally - just writing a post on how overblown the last 24 hours in the news has been over a rumour about Feinberg's rulings. And then voila: a Treasury document containing proposals and Q & A transcript pops up on my handheld. Comments are of course being solicited by the Federal Reserve.

Will make an effort to digest through the day >> more posts coming.

Hat-tip: WSJ.

BREAKING NEWS: Feinberg cuts salaries by 90%, on average

Breaking news, sort of: maybe? Several large business media outlets are reporting that Feinberg has made several ambitious rulings in regard to the compensation proposals submitted to him. I am tepid to qualify this as "breaking" or as "news," since the source cited is vague at best: CNN cites the WSJ and the NYTimes as sources, and Bloomberg merely cites "people familiar with the matter." Okay ... Here's the gossip:

- total compensation for 175 employees is lowered by 50%;
- on average, salaries themselves drop 90%;
- corporate governance changes are demanded, including: disallowing the Chairman of the Board to also be CEO, requiring a Board committee to assess risk, and eliminating staggered boards;
- no one (really? what about Benmosche?) at AIG will receive more than $200,000 in compensation

FWIW (though am more eager for Treasury Department documents or media attention to Feinberg's own statements). This blawg's discussion of Feinberg is available here. Todays news was reported by Bloomberg, CNN, NYTimes, Reuters, and the WSJ.

"Chasm" between Wall St. and Main St. perception of pay; Compensation Czar Feinberg comments

I've learned about the incredible gap, the chasm between Wall Street perceptions and Main Street perceptions. It is a formidable chasm that I'm not sure can be bridged, although the law requires me to attempt to bridge that gap. Kenneth Feinberg, National Conference of Directors, 10/20/2009.

Feinberg's comments accompany the expectation that he will publicly release his rulings on the compensation packages submitted to him. Brief recap: Feinberg is the Special Master ("Compensation Czar") under TARP for all issues related to executive compensation. Part of his duties are to review and approve compensation for senior executives at companies that received substantial federal monies. This includes AIG, BofA, Citigroup, GM, GMAC, Chrysler, and Chrysler Financial. Blawg discussion about Feinberg and his role as Compensation Czar can be found here.

Some of Feinberg's public comments at the Conference are worth repeating here. Principally, he described the various methods he has used to deal with executive compensation contracts concluded prior to the distribution of the federal monies (and therefore largely beyond his simple approval of disapproval). He suggests in alternate order:

- that although he could in theory attempt to invalidate contracts, he has not;

- that he could, and frequently has, renegotiated contracts;

- or that if the contract must remain intact, he then reviews the compensation of that executive moving forward, and considers how he might adjust future compensation to ameliorate for current pay.

Further, when asked about Occidental's recent purchase of Phibro (or alternatively put, Citigroup's clever avoidance of the drama Andrew Hall's $100 million bonus would cause), Feinberg responded: "Go talk to Citigroup" and "[T]he result speaks for itself."

Feinberg also indicated that statutorily, his office does not have an expiration date and that: "We'll finish 2009 and we'll see where we go from there."

Although there is some indication that the business community is eager to see Feinberg's rulings released, potentially as a "blueprint" for acceptable executive compensation practices moving forward, there is also anecdotal evidence that companies are finding alternative methods of compensating senior executives (for instance, perks such as car service and driver, as well as personal tax and accounting services).

Consumer Financial Protection Agency (“CFPA”) moves forward today: to pre-empt or not to pre-empt?

The House Financial Services Committee meets again today to mark-up draft legislation on the Consumer Financial Protection Agency (“CFPA”). The hearing is scheduled at 2pm EST and a live webcast is available here. I have blawgged about the CFPA here and arguing for allowing continued pre-emption; here’s a public policy paper arguing against continued pre-emption.

Recall last week the Committee created significant news for having adopted the Miller-Moore Amendment, which exempts “small” banks and credit unions from CFPA annual examinations. (Where “small” is defined as banks with assets less than $10 billion and credit unions with assets less than $1.5 billion). The Miller-Moore exemption actually eliminates the annual examination for 8,000 of 8,200 banks (or, 98% of American banks). Per the American dream, however, that big bank 2% actually holds 80% of national banks assets, or $11.2 trillion. Bottomline: CFPA would still write rules for all banking institutions, and could investigate a consumer complaint against any bank of any size. (The headlines last week indicating the Committee had caved to special interests were largely overdone - shocker ... The amendment only exempts small banks and credit unions from annual examinations).

Photo credit: Brendan Smialowski via NYTimes.

Speaking of re-regulation: John Thain and CDOs-squared

Continuing with the theme of the immediately preceding post - what brought us into this economic state ...

I will admit: apart from a guess based on threshold derivative knowledge of what a collateralized debt obligation ("CDO") is, I have no functioning knowledge of what a "CDO[s]-squared" is. But former Merrill CEO John Thain does, and he had some things to say about it earlier this week.

These instruments were so complicated. One of these — I’m talking now about ABS CDOs, and actually the CDOs-squared are even worse. Merrill created one. I picked one particular one. To actually model out the things that are inside an ABS CDO [is difficult] because derivatives are already inside the CDOs. They’re already derivatives created out of derivatives. So you have to go way underneath to get to the actual pools of mortgages. To model correctly one traunch [sic] of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities.

Creating things that you don’t understand — that the buyer doesn’t understand, that the rating agency doesn’t understand, that the regulator doesn’t understand — is really not a good idea no matter who owns it. I think that the degree of complexity that was created in the securities, and the lack of anybody’s ability to really understand how they were going to perform, was simply an error and a bad thing. The fact that the firms that created them were stupid enough to own them doesn’t make me feel any better.

UPENN Wharton Transcript of the Q & A available here.

Hat-tip: Dealmaker.

Will limiting bankers risk-taking really fix it all?

This morning Dealbreaker linked to a NYTimes article that is worth reflection. Regulators around the world have identified what they think were the various boogey-men of this economic crisis, and are making an effort to reduce banker risk-taking, promote long-term perspective, and increase accountability. With that in mind, take into account:

Tie executives’ compensation to their company’s stock price.
Withhold big paydays for years. Claw back bonuses if things go wrong. And force risk-loving traders to gamble with their own money, not just their company’s. In fact, those strictures [sic] were part of a compensation plan that Merrill Lynch adopted voluntarily in 2006 — two years before the company collapsed into the arms of Bank of America. But the Merrill program, which was supposed to align its top employees’ pay with the company’s long-term performance, did not keep workers from taking risks that nearly sank the brokerage giant. And some of its senior executives still stand to collect millions of dollars in stock under the plan.

Hat-tip: Dealmaker.

Navel Gazing and UPDATE: Executive Compensation and Financial Markets

So I’ll admit my own distraction for the last week, but was surprised that when I tuned-in again, the issues of executive compensation and market regulation had been subject to significant movement. Seriously: this is why people are afraid to take vacations.

The Consumer Financial Protection Agency (“CFPA”) being proposed by the Obama Administration (discussed earlier here) has taken some serious heat >> members of the President’s own party are offering competing proposals that in fact contain no mention of CFPA at all. Well, sort of … in place of creating a new federal regulatory structure for financial products marketed to consumers, Representative Walt Minnick (D – Idaho) has proposed having existing state and federal regulators work with one another under a Consumer Financial Protection Council (“CFPC”). Rumor also has it that once supportive House Financial Services Committee Chairman Barney Frank (D – Mass.) has indicated that the final bill will not contain the “plain vanilla mandate;” recall, under the CFPA, the government would create standard financial products that would be required to be offered in tandem with specialty products banks and firms offered to consumers. The House Committee meets today at 10am to continue hearings on the matter; a webcast is available from the House site here.

The SEC is creating a new division of Risk, Strategy and Financial Innovation. The new division will advise the commission on how new developments, products, and trends may affect the financial market and systemic risk. The division actually pulls together functions across existing Commission divisions, including the Office of Economic Analysis and the Office of Risk Assessment.

Microsoft’s Board of Directors approved a shareholder say-on-pay proposal, giving its shareholders an advisory vote on executive compensation. The first vote will happen at this year’s shareholder meeting on November 19th, and then occur again every three years after.

The Federal Reserve itself is moving to amend compensation practices, and is seeking to expand its regulatory reach regarding the compensation of nearly all bank employees. Caps are not being sought, but evidently the Fed is toying with different methods of how to curtail the amount of risk-taking employees throughout the bank take on behalf of consumers.

Glad the Fed thinks it can fix something, because every time you hear a bell ring, another American bank fails.

And our favourite main-man – Kenneth Feinberg the Pay Czar – has announced that within the next several weeks he will be disclosing some of the compensation revealed to him and approved by him. Rumour is Feinberg is looking to set some manner of precedent.

And precedent seems to be all we will be getting out of the recent G-20 meeting on the issue of executive compensation. Each of the world leaders in attendance affirmed their intent to reform executive compensation and capital requirements at banks, and then they each exchanged promise rings and caught the next flight home.

FWIW – a few of the headlines I found in my inbox over the course of last week. My continued obsession with Bank of America (“BofA”) of course continues, and has also been hot lately. BofA warrants its own post, though, so see you at lunch!

Photo credit: Anne Geddes, as portrayed by Pauline Kaill on Playle's Online Auction.

Executive Compensation Update: Guaranteed Bonuses and the Compensation Czar

(Again, mini-posts this morning in light of time constraints - thanks!).

Compensation Czar Feinberg's August 13th deadline for submission of compensation proposals is fast closing. Subject to the deadline are seven firms that received federal funds earlier this year, including Citigroup. In light of this deadline, I found it really interesting that guaranteed bonuses - uncommon during the worst of the economic crisis - have made a noticeable comeback.

Feinberg's 8/13 deadline is not the only government impetus to try and chain down executive compensation ... but a cynic might say both sides - firms vs. public outrage (proxy government) - of this argument are operating blind to the other's actions. So who is in real need of the reality check? FWIW.