Banks : This Week's Whipping Boys

This week Washington found an easy new mark for public anger over the economy: banks. Wall Street firms have actually drawn the bull’s-eye on their own backs, justifying much of that ire. They are, after all, getting ready to pay multimillion-dollar 2009 bonuses to executives and top traders from record profits earned, in part, through federal rescue programs that kept the firms afloat. But as the Washington fire fades, the public may not be left with any real assurances that banks have changed their risk-taking ways or their appetite for bonuses.

For regulators, lawmakers and the White House, pointing fingers at big banks serves to deflect blame from their own actions or negligence in promoting the financial crisis. It wins big points with voters looking for a fall guy. That’s especially true among Democrats trying to earn populist stripes in what is shaping up to be a tough election year. So the outrage continued in earnest this week.

On Tuesday, the Federal Deposit Insurance Corp. released a proposal to tie bank fees to the riskiness of compensation schemes. The Financial Crisis Inquiry Commission, created to uncover the causes of the financial crisis, held its first hearing Wednesday, publicly excoriating Wall Street executives. On Thursday, the administration officially announced its plan for a big bank tax to recoup $120 billion in estimated losses from the $700 billion Troubled Asset Relief Program.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The events make for popular political theater. The prospects for long-term reform remain more uncertain. Obama’s tax to recoup TARP losses is unlikely to win congressional approval even though lawmakers openly criticize bank CEOs. Soon, the FDIC will discover the challenges of tying risk to compensation. It’s not only tough to predict risky behavior, but such schemes also push bankers with the most skill in making money out of regulated firms. Plus the findings of the Financial Crisis Inquiry Commission aren’t expected until Dec. 15, 2010, long after Congress considers various financial reform packages.

Punishing banks that played a large part in many people losing their homes and jobs may feel good, but it could end up backfiring. Banks are in the business of making money. They are sure to pass regulation costs and taxes on to borrowers, despite assurances from Obama. Ban one fee, and they will raise another. More taxes lower the amounts banks have to lend. Already borrowers are seeing mortgages, credit cards and business loans harder to come by. That’s not to say banks shouldn’t be subject to proper rules of the road going forward, but a sentence for past misdeeds could further hurt those already in pain.

The good news is that some Wall Street executives are not as tone deaf as they first appeared. Some banks, including Goldman Sachs and Morgan Stanley, have turned to White House pay czar Kenneth Feinberg for input into structuring executive pay, even though they are no longer under his authority. It’s still too early to tell whether these moves are the result of long-term soul searching or calculated public relations.