The 44-page PowerPoint presentation to federal banking regulators was clear and direct: Letting companies pay their chief executives in stock that the CEOs could sell while still working for the companies risked disaster.
But regulators never acted, despite a law Congress passed in 2010 — after the 2008 financial crisis — instructing the government to prohibit “excessive” compensation for executives who took big risks. Now, the collapse of Silicon Valley Bank and Signature Bank in March is driving renewed scrutiny of executive pay — of the failure of U.S. authorities to act over the past decade, and also the increasing uncertainty that Congress will approve new legislation to overhaul CEO pay incentives.
Former SVB chief executive Greg Becker made roughly $34.6 million selling his bank’s stock in the past five years, according to the financial research firm VerityData, including $2.3 million just days before the bank imploded on his watch. Insiders at Signature sold more than $100 million of stock from 2020 through 2022, The Wall Street Journal reported.
The Biden administration spent roughly $20 billion from a taxpayer-backed fund to guarantee SVB’s deposits, even those over the usual protection limit of $250,000. Washington policymakers on both sides of the aisle have demanded that federal authorities “claw back” Becker’s pay to help recoup some of the money paid by the Federal Deposit Insurance Corporation. But doing that is likely to prove extremely difficult, experts and government officials say — in part because regulators did not change the rules on bank pay. (The FDIC projects that its plans to sell SVB’s remaining assets could reduce the overall net loss to closer to $3 billion.)
“Taking home tens of millions of dollars for very high-risk trading and investment incentivizes people to do the wrong thing,” said Dennis Kelleher, a founder of Better Markets, a Washington policy advocacy group. “Everyone has known about this forever. And yet we’ve done almost nothing about it.”
‘It’s a scandal this never got done’
In March 2009, American International Group disclosed that it would pay more than $100 million in bonuses to executives in its financial division. The insurance corporation had received more than $170 billion in a taxpayer bailout at the end of 2008 to prevent a broader panic on Wall Street, after selling financial instruments tied to questionable mortgage-backed securities around the world.
The bonuses sparked a public outcry — and they were just one example of the controversial compensation packages for Wall Street executives whose firms received billions of dollars of federal support during the financial crisis. In President Barack Obama’s 2010 banking reform law, known as Dodd-Frank after its chief sponsors, Congress told federal regulators to write rules to prohibit pay arrangements that “encourage inappropriate risks.”
The law appeared to provide sweeping authority for changing how bank executives were compensated. But momentum soon stalled. Six federal regulatory bodies — the Federal Reserve, FDIC, SEC, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Federal Housing Finance Agency — were involved in turning the legislative text into regulations, and the agencies were sharply divided.
While the public clamored for a crackdown on CEO pay immediately after the bank bailouts, the pressure on federal authorities soon swung in the opposite direction. Financial-sector lobbyists and influential trade organizations overwhelmed members of Congress and regulators with thousands of letters and comments on the proposed guidance.
“What we have here is veto by omission,” said Sen. Robert Menendez (D-N.J.), who wrote the Dodd-Frank provision on executive pay. “They don’t like something Congress passes into law — so they just don’t act on it.”
Splits between federal authorities intensified. Officials at the SEC, for instance, wanted to ensure that the rules did not inadvertently choke off economic activity or drive talented executives away from the banking industry, according to Scott Kimpel, a former SEC official now at Hunton Andrews Kurth, a law firm.
“Where do we draw the line between healthy and unhealthy risk? There can be a good debate about it and there’s no single person who knows the right answer to that,” Kimpel said. “You can have a significant impact on the economy by driving capital to different places and making executives work at places that are not regulated, which affects the talent pool.”
The Dodd-Frank Act, signed into law in July 2010, gave federal banking regulators nine months to release new rules on executive pay. But five years later, regulators were still debating the first draft of the plan. In 2016, federal banking regulators tried again, putting out for public comment a second draft that ran more than 700 pages. Then Donald Trump was elected president, and the prospect of more GOP-appointed regulators ground the entire process to a halt.
“‘I just can’t believe we never finished this,” said Michele Alt, who helped lead legislative and regulatory activities department at the Office of the Comptroller of the Currency and now works at the Klaros Group, a financial services advisory firm. “It’s a scandal this never got done.”
Failure to act hangs over response to SVB
At SVB, former employees say, executives were determined to deliver ever-increasing profits, and the bank pursued a strategy designed to achieve this even at a time of rock-bottom interest rates. Starting in 2020, SVB bought longer-term bonds that paid higher interest than the bank was paying out to its deposit customers, helping the bank juice its returns.
But that strategy was vulnerable if interest rates rose, an internal model warned. Instead of changing course, the bank’s senior executives changed an assumption in the model that made the strategy appear less risky, The Washington Post has reported. The new assumption — extending how long to expect customers to keep their money in the bank — proved profoundly misguided. As rates rose and the tech sector ran into head winds, many of the bank’s start-up customers withdrew funds faster as they burned through cash or moved it to earn higher interest. That forced SVB to sell securities at a loss, touching off a panic that doomed the bank.
“It’s the asymmetry here that is really key: The executives get the upside of the risk, and the downside of the risk is someone else’s problem. That is the core of the issue,” said Simon Johnson, an economics professor at MIT.
The nation’s top policymakers and regulators are examining SVB’s demise. The SEC and Justice Department opened an investigation into stock sales that Becker and Dan Beck, SVB’s chief financial officer, made days before the bank went under.
“Mr. Becker conducted himself appropriately at all times, and that will be established once the full story is told,” said a statement from Becker’s lawyer, Jim Kramer. Lawyers representing Beck did not respond to a request for comment.
Becker and Beck sold the shares according to preapproved plans that dictate when and how much to sell, commonly used by executives to shield them from allegations of insider trading. Both executives created the plans within a week of the bank’s reporting its quarterly earnings in January, a typical window for such arrangements.
The sales also coincided with a new SEC rule that went into effect the same day, requiring a “cooling-off” period of 90 days between adopting a trading plan and selling shares. Becker sold stock options that were due to expire in May, and waiting longer could have made it trickier to unload the shares.
“If he waited, the options would expire before he’s allowed to sell,” said Ben Silverman, the director of research at VerityData. “I don’t see anything particularly fishy there.”
After their last sales, Becker still owned more than 90,000 shares, the most of any insider. The stock is likely to be worthless.
Meanwhile, federal banking authorities are investigating whether “unsafe or unsound” practices contributed to the bank’s collapse, after which they may assess potential civil penalties or ban executives from working in the industry.
And yet financial experts do not think these inquiries are likely to undo the damage caused by SVB’s collapse. The banking regulators’ investigations could take months to conclude and are likely to lead to drawn-out court action that could take years.
“Even if they get, let’s say $10 million back from him — and that’s really a best-case scenario — that’s not really going to do much for the $20 billion the FDIC had to spend, or change incentives for executive compensation,” said Bhagat, the professor who made a presentation to the SEC.
There is one outcome that could make an immediate difference. Lawmakers in Congress have unveiled bipartisan proposals to expand federal authority to claw back bonuses, a measure backed by President Biden. Some of these plans would give federal authorities the ability to claw back up to five years in pay for Becker and other SVB executives — although even that would not add up to the $20 billion that the FDIC spent.
But momentum for action on bank pay is again fading. Financial analysts expect that as SVB’s collapse drifts out of the headlines, resistance to the bipartisan legislation will emerge. Lawmakers who clamored for SVB executives to pay back the bonuses have moved on to other priorities. Spokespeople for House Speaker Kevin McCarthy (R-Calif.) and Senate Majority Leader Charles E. Schumer (D-N.Y.) did not provide estimates for when Congress might take up Biden’s proposals.
“There’s a public ritual that lawmakers feel a need to engage in to yell about ‘holding the fat cats responsible,’” said Bob Hockett, a Cornell law professor who specializes in finance. “But it never gets at the actual problem.”