WASHINGTON The White House warned Wall Street on Wednesday about pay and bonuses climbing back up to pre-crisis levels, while senior U.S. regulators warned of lingering weakness among banks and in the broader economy.
As the stock market surged despite doubts about economic recovery, Congress moved forward on regulating over-the-counter derivatives and setting up a financial consumer watchdog agency in a broad effort to tighten bank and market oversight.
The Obama administration's financial regulation reform effort was gaining headway on Capitol Hill after months of drift and behind-closed-doors negotiations, with bankers and Republicans fighting the Democrats' drive for tougher rules.
More than a year after the worst financial crisis in decades, a U.S. House of Representatives committee was expected to vote on Thursday or Friday on regulating the $450 trillion OTC derivatives market and on the administration's proposed Consumer Financial Protection Agency (CFPA).
The House has already approved a bill to impose new limits on executive pay, but the Senate has not yet acted on the issue, still a political flashpoint.
"Pay on Wall Street can't return to the speculative era that we saw ... right before the economic collapse," White House spokesman Robert Gibbs told reporters.
Echoing earlier comments made by President Barack Obama, Gibbs said "pay has to be based on a reasonable assumption of risk, not speculation."
Congress will soon probe executive pay again at firms that got taxpayer bailouts, such as American International Group (AIG.N) and Bank of America (BAC.N) , the chairman of the House Oversight and Government Reform Committee said on Wednesday.
"What infuriates people is when bosses at bailed out companies ... continue to rake in millions," committee Chairman Edolphus Towns, said at a hearing on AIG bonuses.
"It doesn't seem right that the people who caused this tragedy should be so richly rewarded," Towns said.
BILLIONS IN PAY
A year after U.S. taxpayers committed hundreds of billions of dollars to bailing out financial firms, big banks and securities firms were on track to pay employees $140 billion in total pay and benefits this year, The Wall Street Journal reported.
That would be about 20 percent more than last year for employees at 23 top U.S. investment banks, hedge funds, asset managers, and stock and commodities exchanges, it said.
To address the pay issue and plug gaps in regulation to prevent another crisis, Obama wants quick action on financial reform. The financial services committee was expected to vote on OTC derivatives and financial consumer protection bills on Thursday or Friday. A House floor vote on a reform bill was expected in November. The outlook in the Senate was unclear.
Administration officials and leading Democrats are concerned that momentum for change could dissipate as the economy and markets recover. The U.S. benchmark Dow Jones industrial average closed at 10,015.86 on Wednesday, rising above the 10,000 level for the first time in a year.
The stock market's bullishness contrasted with some dire warnings from bank regulators, however.
U.S. Comptroller of the Currency John Dugan said credit quality continues to deteriorate across almost all classes of banking assets, in nearly all sizes of banks.
He said national banks will need to set aside more capital and reserves to absorb these potential losses, which could cause more small institutions to fail. But he also noted most national banks can withstand the declining asset quality.
BAIR ON PROBLEM BANKS
The number of so-called "problem banks" and bank failures will remain high for the next several quarters, and the economic recovery may not be as robust as in past cycles, said Sheila Bair, chairman of the Federal Deposit Insurance Corp.
She said the most prominent area of risk for banks is their commercial real estate exposure.
At a Senate Banking Committee hearing with Bair and Dugan, Federal Reserve Governor Daniel Tarullo said there was merit in Obama's proposed CFPA watchdog for financial consumers.
Democrats in favor of the CFPA clashed with Republicans at a financial services committee working session focused on that proposal and the proposed OTC derivatives rules.
Republican Representative Jeb Hensarling criticized the CFPA as "a new federal agency with draconian powers."
Democratic Representative Brad Miller said the CFPA would improve "fractured oversight" of financial markets.
House Financial Services Committee Chairman Barney Frank, a Democrat, on Wednesday moved to toughen his bill, adding a provision to require exchange trading for some derivative contracts in a switch from an earlier stance.
Lawmakers are keen to minimize systemic risk to the U.S. economy from OTC derivatives, but avoid imposing unneeded costs on U.S. corporations that are not central to those risks.
Just a handful of mega-banks control more than 90 percent of the derivatives market, among them Bank of America, Citigroup, Goldman Sachs (GS.N), JPMorgan Chase (JPM.N) and Morgan Stanley (MS.N).
Frank said he saw no "major differences" between his and the House Agriculture Committee's OTC derivatives bills.
(Additional reporting by Charles Abbott, Christopher Doering, Rachelle Younglai and Glenn Somerville)