How Many Banking Crises Until We Rein in Wall Street Pay?
By Meron Lemmi, Policy Coordinator, Corporate Governance and Power
On June 17, 2024, the Americans for Financial Reform Education Fund hosted a webinar with labor union and advocacy experts to discuss how misaligned executive compensation structures at financial institutions can encourage excessive risk-taking that can lead to widespread financial crises. Guided by AFREF senior policy counsel Natalia Renta, the session emphasized the necessity of addressing compensation practices that threaten financial stability and consumer protection. The webinar highlighted the nearly 14 year delay in implementing Section 956 of the Dodd-Frank Act, which mandated rules to curb compensation practices that incentivize “inappropriate” risk-taking. Natalia noted recent efforts by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the National Credit Union Administration (NCUA) to revisit a 2016 proposal and stressed that full implementation depends on actions from the Securities and Exchange Commission (SEC) and the Federal Reserve.
Keynote speaker SEC Commissioner Jaime Lizárraga discussed what is at stake with this rulemaking: “This is about safeguarding not just the financial system but fundamentally protecting the workers and the public who are most affected by these crises.” Through his own personal stories and historical insights, he demonstrated how past compensation models contributed to profound financial disruptions, severely eroding household wealth and economic stability. Lizárraga highlighted that a quarter of U.S. families lost at least 75% of their wealth during the financial crisis, with widespread increases in unemployment and foreclosures. These impacts were more severe in Black and Latine communities that bore the brunt of the foreclosure crisis and surging unemployment. He warned that history is poised to repeat itself, referencing the recent regional banking crises as proof of the ongoing risks. Concluding his remarks, Lizárraga stressed that implementing Section 956 is essential to prevent another avoidable financial crisis and ensure the long-term stability of financial institutions.
Bart Naylor of Public Citizen illustrated the intricate challenge of aligning all six required regulatory agencies to implement Section 956, noting that each agency holds significant veto power. He clarified recent developments that identified the holdouts preventing progress, especially highlighting the need for the Federal Reserve to take action. Naylor emphasized, “Bankers caused the crash because they were paid to,” and referenced Public Citizen’s report, which connected executive compensation to various banking misconducts, such as the creation of fake accounts and insufficient anti-money laundering controls at major banks. He recounted how the Federal Reserve Chair Jerome Powell expressed a desire to “understand the problem we’re solving” in a recent hearing, suggesting a reluctance to acknowledge the urgency and necessity of the rule. This attitude poses a significant barrier to progress. Naylor wrapped up by addressing Powell’s comments directly, arguing that the wealth of evidence, including independent analyses, congressional demands, White House statements, and the Federal Reserve’s own analysis of the Silicon Valley Bank failure, should more than clarify the “problem we’re solving.”
Following Naylor’s insights, Erin Markiewitz from the AFL-CIO stated that the rule should include extending deferral periods for executive pay, enforcing mandatory forfeiture of deferred compensation under certain circumstances, and banning stock options and hedging to address the core compensation disincentive problems. She also recommended instituting strong, uniform executive pay guardrails at all financial institutions covered by the rule, instead of reserving the most stringent ones for the largest entities only. These measures would deter risky behaviors and ensure that executives have a vested interest in the sustained health of their institutions. “By implementing these provisions,” she argued, “we can protect not just the financial system but also the livelihoods of countless working families.”
Kier Cuadras shared an insider’s view from her two decades at Wells Fargo, critiquing the current bank’s leadership for favoring short-term financial gains over long-term stability and employee welfare. She highlighted significant transparency issues and the lack of genuine employee representation within the bank. Cuadras’s call for unionization underscored a movement towards improving conditions and ensuring that employee voices contribute to governance and institutional integrity. She argued that had Wells Fargo been unionized at the time, the infamous fake accounts scandal would not have happened.
John Keenan of the American Federation of State, County, and Municipal Employees (AFSCME) spoke on behalf of public workers whose retirement savings were jeopardized during the 2008 financial crisis. He highlighted the critical role of Section 956 in protecting public pension funds from the reckless compensation practices that persist in the banking sector. Keenan’s perspective underscored the stark contrast between the fates of bankers, who received substantial bonuses even as their companies faltered, and public employees, who faced severe losses. He called for immediate action to implement deferred compensation requirements and other measures to safeguard workers’ retirement security and prevent future crises.
Closing the webinar, Sarah Anderson of the Institute for Policy Studies discussed the significant systemic risks posed by current compensation practices. She criticized the substantial influence of Wall Street lobbying that has stalled critical financial regulations and called for robust public engagement in advocacy to push these necessary reforms forward. She gave the audience a concrete opportunity, calling on them to sign a petition calling on the regulators to finally implement Section 956. We need to hold financial institutions accountable and promote regulatory measures that protect the public.