CEO Pay

The Financial Reform bill has been passed by both houses of Congress and now awaits President Obama's signature. When the President signs his name, the new law will be the biggest improvement to regulation of the financial industry in generations. It's a big change with a lot to it, but reigning in Wall Street and the excesses of finance will not be accomplished with one new law alone. But for now, it's time to celebrate what truly is an historic victory.

Of the many good things in the final package, the new consumer protections may be the sweetest. The new Consumer Financial Protection Bureau made it through in a reasonably strong form, and has a chance to truly protect consumers from many of the abuses that plumped up bank profits and bonuses at the expense of the public. Members of UFE and our Responsible Wealth project deserve to be particularly proud for standing up for the consumer financial protection in this bill.

Chris Sturr at Dollars and Sense (a magazine you should subscribe to if you don't already) runs down some more details. He links to an excellent explanation of what's in the bill, what got cut out, and what never even had a chance.

Some more reactions:

• Shahien Nasiripour (who has also become a must read) teams with Ryan Grim at the Huffington Post for a wrap up on passage of financial reform.

• Ezra Klein highlights some of the positives.

• Simon Johnson is hard to please, but he sees some encouraging similarities to past regulatory efforts.

• And Kevin Drum made a good the case for the bill when it's passage was still, at least somewhat, in doubt.

Photo credit: Shirley Two Feathers

The US Senate is combing through the American Jobs and Closing Tax Loopholes Act of 2010 this week. Included in that bill is a provision to close the loophole on what's called "carried interest," which is where most of the income of hedge fund and private equity firm managers comes from.

About the loophole: mega-rich financiers' incomes are a percentage of their funds' annual profits. Our friends at Citizens for Tax Justice explain that managers of various investment partnerships are generally compensated with a "two and twenty" system–that is, they receive a 2% management fee and 20% of all profits of the investment, even if they didn't contribute any funds up front. They claim that income to be capital gains, distinct from earned income, which is therefore subject to the much lower capital gains tax rate of 15% (vs. the top income tax rate of 35 percent).

Ergo, billions of dollars are lost each year to insufficient and unfair taxation on the incomes of these investment banking leaders. Closing this loophole could generate an estimated $25 billion in federal revenue over 10 years.

Len Burman, fellow at the Brookings Institute, had this to say on NPR's Morning Edition:

"It's a huge windfall to some of the best-off people in society, [...] High-income people are supposed to be taxed at the highest rates, 35 percent, [...] But people who are lucky enough to be in the private equity or hedge fund business get their income taxed at a 15 percent rate."

Despite popular anti-Wall Street sentiments and broad, multi-class support for increased taxes on America's wealthy, closing the carried interest loophole is not guaranteed. Alan Sloan gives a personalized take in the Washington Post...  Read more >>

Over at The American Prospect, Tim Fernholz provides a thorough rundown of how the financial reform conference committee will work. The whole piece is worth reading. If you don't have time, here's one key point:

The committee will use the Senate bill, with a few House-bill substitutions, as the default working text, which gives an advantage to reformers, since the Senate bill -- which includes the Volcker rule and tough derivatives-reform provisions -- is stronger than the House bill. 

The final bill is likely to be far closer to the Senate version than the House bill, because the unified bill will again need to clear the 60 vote hurdle in the Senate but will only need a simple majority in the House.

Some key points of what is in and what will be debated are below:

Consumer Protection is in and will stay there, but whether it's a standalone Agency (as in the House bill) or a Bureau housed at the Fed (as in the Senate version) is up for debate. The likely outcome is that this hot button issue will hew closely or exactly to the Senate version in order to hold the coalition of Senators necessary to prevent a filibuster. A standalone agency is preferable, but the inclusion of meaningful protection for consumers of financial products looks like it will be one of the major victories of this effort. It's not time to celebrate until the bill is signed into law. Thanks are due to our members who raised their voices in support of it and to all of our coalition partners for getting it this far.

Say on Pay is in as well. There is nothing in either bill that will directly and concretely end the worst excesses of CEO pay and bonuses in the financial industry. Say on Pay is at least a step in the right direction. That's why we started sponsoring a series of Say on Pay shareholder resolutions last year. Our coalition helped to build momentum for the right of shareholder to have a say on the pay of top executives at publicly traded companies. It's good news that Say on Pay is about to become the law of the land for finance.

Derivatives Reform is the hottest topic for the conference committee. The Senate bill includes the Lincoln amendment on derivatives that the banks hate and one of the worlds greatest living economists loves. We know Senator Lincoln (D-AR) best for her disturbing pro-Walton stance against common sense and popular opinion on the estate tax. Her strong amendment on derivatives reform was a pleasant change of pace. Whether it makes it through the conference is one one of the more interesting questions for the bill. Whatever the fate of the Lincoln amendment, it is great news that the requirement that derivates be traded through a clearinghouse will almost certainly make it into the final bill.

More Details: Annie Lowrey has the schedule. And the Washington Post put out a nice summary of some of the differences to be resolved between the House and Senate bills. Mike Konczal has an excellent summary of some keys to what's at stake in the conference committee. 

UFE Board President, Prakash Laufer, comments on Washington's policy response to the Great Recession, announcements of big banks' booming profits and bulging bonuses, and the continued economic challenges facing communities of color.

UFE Board member and co-author of State of the Dream 2010: Drained, shares his views on the recent megabank bonuses in light of the persisting unemployment and foreclosure crises in this op-ed in Common Dreams.

Responsible Wealth Project Director Mike Lapham lays out the three essential pieces to effective financial reform: regulating executive compensation, separating financial “casino” activities from regular banking, and creating a consumer financial protection agency.

Former UFE board member Holly Sklar writes, "The Great Depression gave way to the New Deal. The Great Recession has become the Great Ripoff." She explains our misguided bank rescue plan and why we should crack a whip on Wall Street.

Authors of the Institute for Policy Studies report, Executive Excess 2009: America's Bailout Barons, call out pay czar Ken Feinberg for not acting boldly enough to rein in executive pay. Representatives from IPS and Responsible Wealth are available for interview on this breaking news in executive pay regulations.

"[T]he issue of income disparity threatens our democracy -- and it cannot be defended. And, if you are reading this and are a person of wealth and assume this isn't about you, it most assuredly is about you, because in the end this is about all of us." George Mitrovich cites Executive Excess 2008 in this riveting opinion piece on the state of our economy.