Stop the Presses…Fed Looking at Banker Pay

In an unprecedented move, at least according to The Wall Street Journal, the Federal Reserve today unveiled a plan to regulate compensation practices at major financial institutions (even those beyond Feinberg’s hit parade). Sorry, am I missing something here? In once again making a few vague statements about the need to better align incentives on Wall Street, has the Fed actually done anything meaningful today? Methinks not.

And it doesn’t seem like the Fed will do anything meaningful on the matter going forward. Practically by its own admission, the Fed is likely to favor fuzzy guidelines as opposed to formulaic approaches. Don’t get me wrong, I think there’s something to be said for eschewing a one size fits all approach. Frankly, universal pay caps strike me as idiotic. At the same time, I worry that by not promulgating specific, clear cut rules, the Fed may be wasting its time.

Credit where Credit (Suisse) is Due?

I’ll preface this post by saying that Credit Suisse (CS), the Swiss financial services giant, is by no means the bellwether of the financial industry, but it is a place worth paying attention to. Compared to its Zurich-based counterpart, CS has fared relatively well during the credit crisis. Of course, it doesn’t take all that much to beat UBS, which dropped the paltry sum of $18 billion last year. Still, of all the global investment banks headquartered in Europe, CS and Barclays have probably fared the best since Lehman collapsed.

If you disagree or simply don’t give a shit about banks across the Atlantic, fear not since the point of this post is not to survey the competitive landscape beyond our borders. Rather, I bring up CS because the bank made headlines today with an announcement to more closely link bonuses to firm profitability. In doing so, the bank will follow Morgan Stanley, UBS, and Citigroup by awarding a greater portion of executive pay in salaries as opposed to bonuses.

As CS is now the fourth major investment bank to make such a move, I am not calling attention to the decision on account of its originality. I do, however, think it’s important because CS wasn’t under as much pressure as either UBS or Citigroup to make any changes. Unlike UBS and Citigroup, which together lost nearly $50 billion last year, CS kept its annual loss to only about $7 billion. Okay, -$7 billion isn’t chump change, but it did make CS the most profitable global investment bank in Switzerland in 2008.

The real question is whether a move to alter compensation practices will matter. At this point, I think it’s too early to tell. Clearly, though, something has to be done, and in the upcoming months, I expect even better positioned banks to make similar announcements. A bonus system that encourages traders to bet the house (if not the country) is a system that no doubt needs to be reformed. And with a framework that better aligns the incentives of employee and employer, perhaps the most profitable Swiss bank going forward will actually make a franc or two.