President Barack Obama on Thursday criticized the bonus-driven culture of trading desks at Wall Street banks as a risk to the stability of the financial system.
In an interview that aired on American Public Media's Marketplace radio program, Obama said an "unfinished piece of business" is to address banks that "take big risks because the profit incentive and the bonus incentive is there for them."
The issue is "going to require us looking at additional steps we can take," Obama said, without offering specifics.
White House press secretary Josh Earnest told reporters that the president wasn't suggesting a new rule.
"There's no specific thing that the president had in mind," and his comments reflected the need to monitor and assess risks that might emerge, he said. "This is something the president and his economic team are talking about every day."
If Obama follows through, it would add to pressure on banks that have already cut or reassigned scores of traders, driving many to join hedge funds ahead of a Dodd-Frank Act measure seeking to rein in risky bets. The regulation, known as the Volcker Rule, after former Federal Reserve Chairman Paul Volcker, will restrict the once-lucrative business of speculating for the accounts of the nation's biggest lenders.
The rule will cap ownership stakes in hedge funds and private-equity funds, and curb short-term wagers, in which traders seek to generate profit for their banks by anticipating market moves or capturing price differences. It doesn't limit most longer-term investments. The measure is supposed to let bank traders continue facilitating orders for clients.
Alan Johnson, founder and managing director of New York-based Johnson Associates Inc., who advises Wall Street banks on compensation, said in a phone interview that Obama's comments were "just weird."
"Trading is so far down from the peak, they've spent an endless amount of time and energy to reform trader pay -- to say that trader pay needs to be reformed is just bizarre," he said.
The ability to make big risky bets has been dramatically reduced, he said, calling Obama's comments "just political -- when it doubt, blame Wall Street."
"This idea that Wall Street is this sort of great evil is at best simplistic," Marketfield Asset Management Chairman Michael Shaoul said Thursday on Bloomberg Television. "I think Wall Street is an easy target."
Visiting a hub for startup companies in downtown Washington on Thursday, Obama only waved when a Bloomberg reporter shouted a question to him about the bonuses.
Wall Street employees took home an average bonus of $164,530 last year, the most since the 2008 financial crisis and the third highest on record, according to estimates released in March by New York state Comptroller Thomas DiNapoli.
While the collective bonus pool rose 15 percent to $26.7 billion in 2013, the increase was fueled by compensation deferred from prior years. Delaying payouts is meant to discourage employees from trying to reap quick payouts by taking risks that can hurt their firm in the future.
Obama said banks need to change "how they work internally" to alter incentives for traders.
"Right now, if you are in one of the big banks, the profit center is the trading desk, and you can generate a huge amount of bonuses by making some big bets," Obama said in the interview. In the event of "a really bad bet," he added, "you might end up leaving the shop, but in the meantime everybody else is left holding the bag."
Obama said the 2010 Dodd-Frank financial regulatory law that his administration backed has reduced the risk by requiring banks to hold more capital as a cushion against a financial institution triggering a broader crisis. It also reduces the risk to taxpayers, he said.
Still, he said, he has told his economic team that the administration should take steps "to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy."
Financial regulators already have the authority to carry out Obama's message, said Marcus Stanley, policy director for Americans for Financial Reform. The Dodd-Frank Act required banks and Wall Street broker-dealers to ban bonuses that encourage dangerous levels of speculation and risk-taking.
A proposal issued by the Treasury Department, Federal Reserve and other agencies in 2011 would have required delayed bonus payouts for executive officers or leaders of major business lines. Separately, a bank's board of directors would have to approve bonus structures for employees whose trading could expose an institution to hefty losses, the proposal said.
"It's just a very weak rule," Stanley said in a phone interview. "It didn't go beyond what banks were doing, and in some cases, didn't go beyond what banks were doing before the financial crisis."
Business on 07/04/2014