“A bank executive who seeks to maximize short-term gain at the expense of solvency is not just putting his bank’s shareholders and creditors at risk, but also the US taxpayer and the FDIC deposit insurance fund,” said the letter. “By seeking to foreclose that possibility, the FDIC continues to earn the kind of public trust that is so lacking throughout the regulatory community.”

The letter continued: “While it would be nice to presume that large banks are chastened by their recent need to beg the public for capital, it is clear that financial services executives ‘just don’t get it.’”

Employee compensation is one of several reforms the FDIC is entertaining in the wake of Wall Street’s financial meltdown and the public’s sustained mistrust of financial sector leaders who received large bonuses following a taxpayer bailout. The agency is seeking public comment about the new rules.

“I believe this [Advance Notice of Proposed Rulemaking] suggests a good approach by targeting compensation structures, rather than levels of compensation,” Bair said in a statement. “It contains no features which would limit the amount of compensation paid to employees. And I feel that the supervisory efforts underway can be strengthened by the FDIC’s effort to provide incentives for banks to achieve higher standards.”

The full text of the House members’ letter:

Sheila Bair
Chairman
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW, Room 6076
Washington, DC 20429

Dear Chairman Bair,

We write to applaud you for taking an important step towards holding bank executives accountable for risky, destructive behavior. If your proposal to tie deposit insurance premiums to executive compensation structures is enacted, banks will be charged more for deposit insurance if their executives gamble with the firm’s money. Our constituents feel that executives on Wall Street have looted their banks, and then have billed taxpayers “for services rendered.” They have lost confidence in other regulators. Thanks to you, finally it seems as though there’s a cop on the beat on Wall Street.

A bank executive who seeks to maximize short-term gain at the expense of solvency is not just putting his bank’s shareholders and creditors at risk, but also the US taxpayer and the FDIC deposit insurance fund. By seeking to foreclose that possibility, the FDIC continues to earn the kind of public trust that is so lacking throughout the regulatory community.

On the specific question of whether pay packages contribute to risk, it should by now be quite obvious that a financial institution that pays its executives with a ‘heads I win, tails you lose’ pay package is likely to destroy itself. We saw this during the Savings and Loan crisis, during the bailout of Long Term Capital Management, and during the most recent financial crisis. Paul Volcker, Bill Black, Simon Johnson, and other economists and observers have made this point.

It’s also clear, as well, what happens when executives have well-designed pay packages. When “bulge bracket” investment houses were private partnerships, executives were leery of putting their own capital on the line in risky schemes. This created a natural barrier against reckless and risky behavior. When Wall Street firms began going public, and offloading risk onto shareholders, executive behavior suffered. Now that these firms can gamble with money from the Federal Reserve and from taxpayers, executive behavior is even worse.

While it would be nice to presume that large banks are chastened by their recent need to beg the public for capital, it is clear that financial services executives “just don’t get it”. Lloyd Blankfein of Goldman Sachs recently claimed that his firm is ‘doing the lord’s work’. Harvard Business School Professor and Goldman Board member Bill George just compared bankers who lose gargantuan amounts of money to professional athletes and movie stars. The large bank lobby has worked furiously to water down reform; the Securities Industry and Financial Markets Association is resisting a mild fee on large banks, and aggressively sought loopholes in derivatives legislation.

Unlike those at community banks, executives at large Wall Street banks have consistently displayed cavalier attitudes towards risk. Despite large bonuses on Wall Street and the gnashing of teeth among regulators, very little seems to have changed as of yet. We applaud Chairwoman Bair and the FDIC for breaking this damaging cycle of passivity, and taking the first real steps to rein in dangerous executive compensation structures. According to Section 7 of the Federal Deposit Insurance Act, the FDIC clearly has the authority to use any factor it “determines relevant” when assessing the probability that the Deposit fund will incur a loss with respect to any specific institution. Compensation structures are certainly relevant in terms of understanding the risks that these banks are incurring.

We disagree with Comptroller John Dugan’s dissenting statement on this. Comptroller Dugan’s argument is that higher insurance deposit costs are unnecessary merely because Congress is debating granting authority to rein in executive pay, and that the Federal Reserve is working on the problem. He also argues that there is no evidence that executive compensation structures contribute to losses in the Deposit Insurance Fund. These arguments seem meritless. In light of recent history, trusting the Fed to rein in banker pay is like asking an arsonist to guard the armory. His argument that there is “no evidence” compensation structures contribute to institutional risk might have credibility if his own agency had shown any interest at all in stemming the ‘epidemic of mortgage fraud’ that the FBI noted as early as 2004. As is, his arguments simply justify the continued looting of large banks by their executives.

Our constituents are demanding action, not idle chatter. In Congress, we are debating what steps to take. In the meantime, we appreciate outstanding judgment that Chairwoman Bair, Vice Chairman Martin Gruenberg, and Thomas Curry have shown in carrying out their duty to the public.

Regards,

Alan Grayson
Michael Capuano
John Conyers
Lloyd Doggett
Keith Ellison
Bob Filner
Luis Gutierrez
Marcy Kaptur
William Lacy Clay
Eric Massa
Brad Sherman
Jackie Speier
Pete Stark

Source: Wikipedia

Riverview Community Bank in Otsego, Minn., has been cited by the FDIC in connection with “unsafe and unsound banking practices.” Former Secretary of State and current Rep. Mary Kiffmeyer, R-Big Lake, is an owner and director of the bank — a bank that founders say was inspired by the hand of God.

But it seems God hasn’t spared the bank from the national economic downtown. According to FDIC documents (PDF), Riverview invested heavily in real estate and was operating with too few reserves.

“The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe and unsound banking practices and violations of law and/or regulation,” according to the FDIC’s order to cease and desist certain lending practices until the unsound practices are rectified.

It cited Riverview with a number of regulation violations, including “operating with a board of directors that has failed to provide adequate supervision over and direction to the management of the Bank, engaging in hazardous lending and lax collection practices, operating with excessive loan losses and with an excessive level of adversely classified loans or assets, operating with inadequate liquidity in light of the Bank’s asset and liability mix and operating with an inadequate risk rating and loan review system.”

The bank is directed by the FDIC to take corrective action to remedy the issues giving the bank 30 to 60 days to implement a new loan review system and improve liquidity.

The bank made news when it was founded in 2003 after founder Chuck Ripka said he heard the voice of God say, “Chuck, if you do all the things I told you to do, I promise you I will take care of the bottom line.”

Ripka told the Pioneer Press in 2004 that 77 people had “invited Christ into their lives” and that 70 “physical healings” had occurred.

The Lord would make the bank such a success that Ripka would be compelled to “tell the truth about what God is doing here,” he said.

Ripka left the bank in 2006, but Kiffmeyer is still listed as director and owner according to campaign disclosure records.

Economist and NYU professor Nouriel Roubini has repeatedly warned in papers and interviews that the financial and banking crisis will last several years, with credit losses nearing $2 trillion. Since late 2006, a total of 283 lenders have imploded, according to the Mortgage Lender Implode-o-Meter. The bloggers at Implode-o-Meter have been tracking the housing crisis and the fraud inherent in it that has contributed to the toppling of mortgage giants. Currently, 14 lenders are on Implode-o-Meter’s ailing list, including majors like Sallie Mae, Chevy Chase, and Residential Capital, a mortgage subsidiary of GMAC Financial.

The subprime fallout is leaving small banks unstable, too. According to LoanWorkout.org, a consumer-watchdog site, the Federal Deposit Insurance Corp (FDIC), the organization responsible for insuring up to $100,000 in individual bank accounts, might also look to the Treasury Department as its coffers begin to run dry as a result of bank failures and a shored-up cash flow. (Nearly ten percent of its reserves were swallowed up in the IndyMac bust.) Roubini estimates that hundreds of small banks will go bust in the next year, as the average bank has nearly 67 percent of its assets in real estate. The FDIC says it’s currently watching 117 in-danger-of-collapsing banks, which hold approximately $78 billion in assets.

So what do the bank collapses and an already $400 billion in government bailouts mean for you? In taxpayer payouts, we’re already more than 300 percent beyond the Savings and Loan scandal that cost taxpayers $124 billion in the 1980s. And according to Roubini, the current and looming fallouts mean we’re on the precipice of the most severe U.S. recession in decades. “This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices,” he writes on his blog, the Global EconoMeter.

Consumers shouldn’t expect a quick turnaround, he says. Instead, he adds this ominous forecast for America’s future: “This is the beginning of the decline of the American Empire.” The losses are spreading to industrial and corporate loans, to corporate bonds and CDs, Roubini says. Those collapses will lead to a systemic failure of the market, and America as a super power.

The losses also mean more tax dollars going to corporate welfare, that every person is a “shareholder” in seriously unstable companies Fannie Mae and Freddie Mac, and that the already swelling federal deficit just ballooned further. And it means that those responsible for the crisis, voracious executives and directors whose unstoppable appetite for profits caused the biggest financial crisis since the Great Depression, get off easy why the American public pays for their greed affair.

In honor of this Depression-era milestone, we look back at a MnIndy July article spelling out just how much the execs at Fannie Mae and Freddie Mac stood to gain on the backs of consumers, and what your hard-earned tax dollars will buy you today:

$13.4 million: Amount in salary and compensation paid to Fannie Mae CEO Donald Mudd in 2007, a 7 percent increase in pay from the year prior despite the fact that the company’s shares lost a third of their value in 2007

$18.9 million: The total amount, not including salary, compensation, and stock options, Freddie Mac CEO Richard Syron is eligible to receive through extension bonuses, “equity grants,” and “performance awards” if he stays through 2009

$12.77 million: The total amount in lobbying expenses paid by Freddie Mac in 2007

$3.3 million: The total amount in lobbying expenses Freddie Mac has paid so far in 2008

$12.3 million: The total amount in lobbying expenses paid by Fannie Mae in 2006

$1.8 million: The total amount in lobbying expenses Fannie Mae has paid so far in 2008

$29 billion: The amount of credit the Federal Reserve awarded to JPMorgan to buy ailing Bear Stearns in March of this year

$124.6 billion: Total paid by U.S. government in the early 1990s for the Savings and Loan scandal caused by fraud and unregulated and imprudent lending practices

747: Total number of savings and loan associations that failed as a result of the scandal

$165 million: Average amount needed to bail out each institution then

$35 billion: Average amount needed to bail out each ailing institution today

More on Fannie Mae and Freddie Mac here.

More on Nouriel Roubini here.