Local bankers, whose pay hasn't been extraordinary and who didn't participate in the practices that caused the 2008 financial meltdown, said Wednesday big lenders - like the four whose chiefs were grilled Wednesday by the commission investigating the collapse - should compensate executives based on long-term performance, not simply on the basis of how many loans they made.
The four chief executives, who testified on Capitol Hill in Washington Wednesday before the Financial Crisis Inquiry Commission, said they had, in fact, made changes in how they pay executives. John Mack, chairman of Morgan Stanley, said he didn't take a bonus in 2009 and that his bank has overhauled its compensation practices to discourage "excessive risk-taking."
The other executives who testified, representing Goldman Sachs, JPMorgan Chase and Bank of America, also said their companies had tightened bonus policies, including provisions to "claw back" some of the money when performance falters.
"A compensation plan that rewards people for simply lending money is not an appropriate one," said one local banker, Kevin O'Connor, president and chief executive of Bridgehampton National Bank.
Douglas C. Manditch, chairman and chief executive of Empire National Bank, based in Islandia, agreed that the system needed to be reviewed. "I think, alternatively, paying with stock that has a lengthy vesting period along with a clawback is fine."
In the short term, he said, that change might hinder efforts to attract top talent. Ultimately, though, executives will have to accept it if it becomes standard compensation procedure, he said. "Acceptance comes with time," he said.
Manditch called also for requirements for more complete disclosure of the risks in investments like mortgage-backed securities, many of which turned out to be toxic - packed with loans unlikely ever to be repaid.
At least one local banker, Joseph R. Ficalora of New York Community Bancorp, argued, however, that the issue of compensation at major banks has been overblown - having "zero relevance to the crisis we just had."
Most loans during the critical years of 2006 and 2007 were made by institutions other than banks - hedge funds, for example, that were less heavily regulated - although he said the big banks ultimately got stuck with the assets. "They went and made loans that couldn't be paid the day they were made," said Ficalora, the bank's chairman, president and chief executive.