FDIC adopts rule to recoup executive pay

July 07, 2011|By Phil Mattingly, Bloomberg News

FDIC chairwoman Sheila Bair received a framed resolution honoring her… (T.J. Kirkpatrick/Bloomberg…)

WASHINGTON - Regulators would be able to claw back some pay from top US financial executives if their companies were liquidated by the government, under a rule adopted by the Federal Deposit Insurance Corp.

FDIC board members voted unanimously yesterday to finalize the rule, which is part of the agency’s expanded authority under the Dodd-Frank Act to resolve the largest financial companies.

“We need shareholders and creditors out there conducting their own due diligence and asking the tough questions of executives and management,’’ said FDIC chairwoman Sheila Bair, who will leave the agency at the end of this week.

The rule authorizes the FDIC to recover pay for the two years preceding its appointment as receiver from senior executives and directors “substantially responsible’’ for the company’s failure. The agency would determine the size of the clawback after evaluating an executive’s role in the shareholders’ overall losses after liquidation.

Dodd-Frank, the financial-regulation overhaul enacted last July, expanded the FDIC’s resolution authority from winding down failed banks to also 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 companies.

The clawback provision was adopted as part of a broader rule aimed at setting the framework for the FDIC’s orderly liquidation powers.

“This rule will have a direct impact on market interactions, and that’s kind of the idea,’’ Bair said.

Lawmakers directed regulators to rein in executive pay after incentive-based compensation was faulted for inspiring risk-taking at companies such as Lehman Brothers and American International Group, the insurer that was rescued by the government.

A coalition of the largest banking trade groups, representing companies including JPMorgan Chase & Co. and Goldman Sachs Group, filed a comment letter with the agency in May calling parts of the rule “fundamentally unjustifiable and counterproductive.’’

“Such a rule could encourage a revolving door of senior executives and directors seeking to avoid recoupment, a situation that would undermine, rather than promote, stability,’’ the groups wrote in the May 23 letter, which was signed by executives from the Financial Services Roundtable, Securities Industry and Financial Markets Association, American Bankers Association, and The Clearing House Association.