Treasury Secretary Timothy Geithner rejected calls Monday to cap executive compensation for bankers whose institutions got Troubled Asset Relief Program (TARP) funds, instead saying the government should focus on curbing incentives for high-risk activity.
"I don't think our government should set caps on compensation," Geithner said during a National Press Club event. "What I think we need to do is make sure we put in place some broad constraints on the incentive[s] compensation systems create. You had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk, and that's something that's preventable."
The Treasury is to release executive compensation rules next week. The rules were required to carry out a stimulus amendment by Senate Banking Committee Chairman Chris Dodd that is designed to rein in improper bonuses. Geithner also said he was preparing a report on regulatory restructuring to be released in the next couple of weeks. The TARP law required the Treasury to submit the report by April 30. Geithner said the administration would be examining the responsibilities of each regulator, including the Federal Reserve System, which some critics have argued is outdated and presents conflicts of interest.
"We have an incredibly archaic, segmented, complex oversight regime across our system that did not prevent huge amounts of risk from building up in pockets of the system that caused a lot of damage," he said. "We never should have let that happen as a country, and we are going to have to change a lot of aspects of [the] regulatory system to reduce the risk in a crisis like this in the future, and part of that will be looking at the basic responsibilities of the supervisors and the regulators, including the Fed's."
He also endorsed consolidation of the regulators.
"We're going to have to bring about broader changes in the basic framework of oversights and better enforcement," Geithner said. "In our system we made it too easy to evade basic protections for consumers. We let people in effect choose their regulatory framework, and that's going to require simplifying and consolidating this enormously complicated regulatory structure."