September 18, 2009

Economic Outlook: Two game-changers

Financial regulators in Washington appear close to a pay policy that could put them deep into banks' boardrooms, and have also proposed a ban on flash trading.

Using logic that extends the idea that its role is to keep financial firms from stumbling, the U.S. Federal Reserve is working on a policy that would allow it to review the rationale, if not exactly the level of pay, that bank boardrooms use in deciding compensation packages, The Wall Street Journal reported Friday.

The proposal taking shape at the Fed would place the sharpest scrutiny on the nation's 25 largest banks, by reviewing their compensation policies and comparing those to the rest of the nation's financial firms, the Journal reported.

The Fed might then tweak boardroom policies without having to directly set a pay level. The tweaks would be designed, nonetheless, to manage the level of risk bankers take.

In July, the House Financial Services Committee moved the same concept forward. The committee approved a bill to give bank regulators veto power on imprudently risky compensation practices at the nation's larger banks -- those with more than $1 billion of assets (roughly 700 banks), the Journal said.

The pay issue, which rises in volume when banks in the midst a financial crisis announce billions of dollars in bonus checks, has an international audience. In advance of the Group of 20 meeting in Pittsburgh next week, Germany, France and Britain have sought common ground for an international pay policy for bankers who some feel were bailed out from an economic mess they helped to create.

Former Fed Chairman Paul Volcker said Wednesday the financial crisis was pushed, in part, by the ultimately explosive combination of compensation practices that provided enormous incentives to take risks.

On Thursday in Brussels, the Journal noted, French President Nicolas Sarkozy agreed to accept an international pay policy that tied the level of compensation to the level of capital banks held.

The Securities and Exchange Commission on Thursday proposed to ban flash trading, a method traders with powerful computers use to take snapshots of trading orders to gain advantage over the rest of the pack.

With computers that can recognize trading pattern with a 5-millisecond view of the market, traders issue buy-and-sell orders almost simultaneously, The New York Times reported. But doing so, SEC commissioner Mary Schapiro, said creates a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities.

The new rule requires a 60-day public comment period. However, this ban, as proposed "¦ should not be weakened by the commission as the rule-making process goes forward, said Sen. Charles Schumer, D-N.Y.

In market activity, the Nikkei 225 in Japan lost 0.7 percent Friday, while the Hang Seng index in Hong Kong lost 0.67 percent. The Shanghai composite index lost 3.19 percent, while the S&P/ASX index in Australia fell 0.46 percent.

In midday trading in Europe, the FTSE 100 in Britain, the DAX 30 in Germany and the CAC 40 in France were all briefly in line, up 0.12 percent at the same moment. The broader DJStoxx 600 was off 0.24 percent.