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Tougher Wall Street Clawbacks Needed, NYC Comptroller Says

New York City Comptroller John Liu
John Liu, comptroller for New York City. Photographer: Ramin Talie/Bloomberg

New York City Comptroller John C. Liu, who oversees $108 billion in pension funds, said Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley should target senior executives’ pay to prevent improper or risky practices.

Liu filed shareholder requests with the three New York-based banks to toughen their so-called clawbacks, which allow the firms to reclaim pay awarded to employees who acted improperly. The lenders, which now limit clawbacks to individual wrongdoers, should target supervisors as well, Liu said in a statement today. The city’s pension funds held $483.3 million in shares of the firms through Dec. 19, according to the statement.

Perverse incentives and bad compensation practices helped cause the financial crisis by encouraging Wall Street employees to disregard risk in the pursuit of profit, according to a study last year by the Council of Institutional Investors. Liu targeted the three firms as they have each paid more than $100 million over the past 18 months to settle charges of improper conduct tied to mortgage-backed securities.

“No one should profit or be rewarded with bonuses when engaged in improper or unethical behavior,” Liu said in the statement. “These tougher clawback provisions will not only recover money that shouldn’t have been paid in the first place, but also set the tone for a stronger standard of conduct for company executives as well as their bosses.”

‘Material’ Losses

JPMorgan, the biggest U.S. bank, and Goldman Sachs, the fifth-biggest, only try to recoup executive compensation after “material” losses, which creates “unrealistically high legal and financial standards,” Liu said. The proposal would delete the word “material” from the requirement, according to the statement. The two firms as well as Morgan Stanley, the sixth-biggest U.S. bank, should make any clawback actions public, according to the proposals.

Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, agreed to pay $550 million in July 2010 to settle regulators’ claims it misled investors in products tied to subprime mortgages. JPMorgan agreed to pay $153.6 million to settle a similar suit in June. Morgan Stanley agreed to pay $102 million in June 2010 to settle claims by Massachusetts that the firm financed and securitized unfair residential loans.

Jeanmarie McFadden, a Morgan Stanley spokeswoman, declined to comment on the comptroller’s request, as did David Wells at Goldman Sachs and Howard Opinsky at JPMorgan.

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