The Federal Reserve is working on a far-reaching proposal to regulate compensation by the nation’s largest banks — including, inevitably, some big New York firms now raking in big profits thanks to government bailouts.

The upshot for Governor Paterson and state lawmakers in Albany: you can’t count on renewed financial sector bonuses to pull you out of your latest patch of fiscal quicksand.

As today’s Wall Street Journal reports:

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.

[snip]

The Fed itself believes it has the legal authority to take such action through its existing supervisory powers, which are designed to oversee a bank’s soundness.

Its strategy appears to go further than what some in the industry were expecting, given that it would apply to many employees, not just top earners. It would go beyond a more generic list of “best practices” that many thought the central bank would craft.

Would the Fed find it necessary to regulate pay as a means of discouraging excessive risk-taking if it hadn’t partnered with the Treasury to bail out so many risk-takers who took on excessive risk in the first place?  Just wondering.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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