Financial Services Update

July 9, 2010

Authored by: Matt Jessee

 Financial Regulatory Reform Bill

Congress was not in session this week due to the Fourth of July district work period. However, the House and Senate return to session next week, and the Senate will likely begin debate on the Dodd-Frank Wall Street Reform and Consumer Protection Act Conference Report. With commitments by Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) to support the bill, Democratic leaders remain two votes shy of the sixty they need to move the bill forward – assuming the Senator chosen to replace the late Senator Robert Byrd (D-WV) also is a “yes” vote. Consequently, Democratic leaders are now focused on getting the three Republicans who supported the original Wall Street reform bill that passed the Senate in May to commit to supporting the Conference Report. Senator Scott Brown (R-MA) officially remains uncommitted even after Democrats took the unusual step of reopening the House-Senate conference committee to remove a $19 billion bank fee he opposed. On Monday, Brown was quoted by a local reporter saying, “I’m going to be making a decision soon, but I’m liking what I see.” Senator Olympia Snowe (R-ME) also indicated last week that she approves of the elimination of the bank fee and is now leaning toward supporting the bill. The third Republican, Senator Charles Grassley (R-IA), remains uncommitted.

EU Parliament Approves Bank Bonus Restrictions

On Wednesday, the European Union Parliament approved a bill that restricts bankers in the twenty-seven nation bloc from receiving more than 30 percent of their bonuses in cash beginning next year. The bill will also make bankers susceptible to losing a portion of their bonus if their bank’s performance erodes over the subsequent three years. Banks will further be required to either reduce salaries of their biggest earners or set aside more capital to compensate for the salaries. The legislation, which passed by a vote of 625-28, codifies a compromise reached last week between European governments and lawmakers. National finance ministers from the respective countries are expected to endorse the proposal next Tuesday, July 13, causing it to take effect January 1. The proposal is similar to the measure approved by the G-20 and is designed to affect banks with large operations in Europe such as Deutsche Bank, Barclays, and Goldman Sachs, including some hedge funds. Under the bill, seventy percent of a banker’s bonus would have to be deferred for up to three years and paid in a new class of security, known as “contingent capital,” that would decline in value if the bank’s financial performance deteriorates.

In June, the Federal Reserve outlined a series of its own bank compensation principles, and at a Congressional hearing last month, Federal Reserve Chairman Ben Bernanke promised to move on further compensation restrictions. Additionally, the Obama Administration’s Special Master for TARP Executive Compensation, Ken Feinberg, is preparing to release a report in the near future on the highest earners at 180 U.S. financial companies.

Matt Jessee, Policy Advisor

Kip Wainscott, Associate Attorney