Posted on Sunday, March 20, 2011
March 15 (Bloomberg) -- The Federal Deposit Insurance Corp. is seeking comment on a measure that would subject executives and directors to clawbacks of as much as two years’ pay if they are found “substantially responsible” for the failure of a systemically important financial company.
FDIC board members voted 5-0 to propose the rule, part of the agency’s expanded liquidation authority under the Dodd-Frank Act, at a meeting in Washington today. In the same vote, board members laid out a framework for priority payment of creditors and procedures for filing claims in liquidations of large, complex firms, for which the FDIC would serve as receiver.
“Today’s action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size,” FDIC Chairman Sheila Bair said in a statement. “Under Dodd-Frank, the shareholders and creditors will bear the cost of any failure, not taxpayers.”
Dodd-Frank, the financial-regulation overhaul enacted in July, expanded the FDIC’s resolution authority from winding down failed banks to untangling the affairs of systemically important nonbanks when they collapse. Congress sought the liquidation authority after the September 2008 bankruptcy of Lehman Brothers Holdings Inc. exacerbated the credit crisis and highlighted the interconnectedness of the largest financial firms.
Lawmakers also directed regulators to rein in executive pay after incentive-based compensation was faulted for inspiring risk-taking at firms such as Lehman and American International Group Inc., the insurer that was rescued by the U.S. government.
Cases of Fraud
The rule proposed today authorizes the FDIC to recover pay from senior executives and directors substantially responsible for a failure for the two-year period preceding the date when the agency is appointed as receiver. In cases of fraud, the time period is unlimited, according to the proposal.
The agency will consider whether executives performed their responsibilities with “the requisite degree of skill and care” before seeking to recoup compensation, according to the FDIC. Still, for top officials including the chief executive officer, there will be “a presumption that they are substantially responsible,” the agency said.
‘You Are Guilty’
“At the margin, it will make bank failures a little bit worse because the presumption is you are guilty,” said Alan Johnson, managing director of New York-based compensation consulting firm Johnson Associates Inc. “It will encourage executives to get off the Titanic before it sinks, and it will make it more difficult to hire bank executives,” Johnson said in a telephone interview.
Executives recently hired to help improve the condition of a company will be exempt, the FDIC said.
The framework for determining how and when unsecured creditors get paid after a collapse gives top priority to borrowings from the FDIC or other lenders to maintain a firm’s operations after it is placed in receivership. Next come administrative expenses and amounts owed to the U.S. Treasury.
Lowest priority is given to distributions “on account of equity to shareholders and other equity participants in the covered financial company,” according to the rule.
The proposal defines a financial company as one that derived at least 85 percent of total revenue from financial activities in either of its two most recent fiscal years.
The board’s vote sends the proposal out for a 60-day public comment period, starting with publication of the measure in the Federal Register.
By Meera Louis, BLOOMBERG--Editors: Gregory Mott, Lawrence Roberts