Financial Regulation, A Plus or a Minus?

Sunday’s lead article in The New York Times was titled, “Obama Seeks to Increase Oversight of Executive Pay.” The article described President Obama’s plan to regulate financial institutions in light of the AIG scandal.

President Obama’s proposal was also aimed at the G-20 summit due to begin on April 2 in London. This meeting of the top 20 industrialized nations will address many issues related to the global financial crisis, and European nations are known to favor more financial regulation in lieu of the stimulus approach being applied in the United States.

The new rules on executive compensation will apply to all companies, not just those accepting bailots from the Federal government.  And it will give a large oversight role to the Federal Reserve.

Two elements of the plan seem particularly fair to me. One, that hedge funds should be under some kind of regulation. These funds typically provided annual returns up to 30 percent of the amount invested and currently operate in a no-mans land where they play fast and loose to generate a lot of money for very wealthy clients. It seems they should come under the same type of regulations as those imposed on other organizations.

The second element ties executive bonuses to performance and prohibits executives from receiving bonuses greater than a third of their annual pay. This also seems fair since it will shift compensation from large unregulated bonanzas to salaries agreed upon by a company board.

Much of this plan can be enacted without Congress through federal regulation, and I think President Obama should move rapidly to do so. This may be the only way to put AIG behind us and proceed to other economic support so essential to our recovery.