The nation is still climbing out of the economic crater caused by a financial meltdown on Wall Street. Congress enacted banking reforms, but a twice-fired top banking executive says we haven't dealt with the underlying cause of bank failures — incentives to take excessive risk.
Sallie Krawcheck, who held top wealth management jobs at Bank of America and Citibank before being fired, says trying to regulate banks in the face of complex financial dealings is a bit of a lost cause. A better remedy is to reward banking executives for being prudent instead of risky.
Despite her firings, Fortune magazine put Krawcheck on the cover of one of its editions in 2002, calling her the last honest analyst on Wall Street.
One of her most intriguing suggestions is to stop compensating top banking officials with stock and pay them instead with bonds. Krawcheck says holding equity is invitation to take risks, while holding bonds is a reminder to exercise caution.
Some of her other ideas include requiring higher and appropriate levels of capitalization for banks commensurate with the amount and type of risks they undertake, something she says no matter of regulation can fully cover. She also advocates shrinking boards of directors for banks so there is more accountability.
It was talk like that that led to her firings. "I was fired in some ways for the right reasons," Krawcheck told Robin Young on the NPR show "Here & Now." "The opinions I'm expressing outside the banks were the opinions I expressed inside the banks."
Krawcheck was fired in the early days of the recession for advocating Citibank return money to investors who were sold securities labeled as low risk, but that turned out to be high-risk securities based on "toxic assets." "I recommended returning the money. There was a back and forth, and I won that battle, but I lost the job," she recounted.
Unlike a lot of Wall Streeters, Krawcheck likes the Consumer Financial Bureau established by Congress as a more independent watchdog on behalf of individual investors. "I believe having a different set of eyes focused on the individual investor and consumer is a good thing," she told Young.
Now working as a consultant to business start-ups and an adviser to Democratic congressional candidate Elizabeth Colbert Busch, Krawcheck is using her reputation to press for practical banking reform — reform initiated at the bank level, rather than as institutional regulation.
She claims it is in the best interest of banks to change because of rising consumer discontent with banks. More transparency and built-in incentives for banking executives to avoid risky investments, Krawcheck contends, will help restore consumer trust in ways banking regulation never will.