CEO Pay Unchecked in Bailout Bill
Monday, January 12, 2009 at 6:00 am
The heads of bailed-out banks could still receive nearly unlimited pay under a new Democratic proposal to rein in executive compensation for firms participating in the taxpayer-funded Wall Street bailout, according to at least one House Democrat, who hopes to add tighter restrictions this week.
Rep. Brad Sherman (D-Cal.) predicts that new legislation aiming to limit executive pay for firms helped by the Troubled Assets Relief Program (TARP) leaves loopholes allowing bank CEOs to reap millions of dollars even as taxpayers spend hundreds of millions to rescue their companies. Sherman said the new proposal takes steps to curb executive bonuses, but places no limit on “$1 million-per-month salaries” and other lavish perks, leaving corporations with broad freedom to pay their CEOs whatever they choose.
“My fear is that the bill will prohibit bonuses but will be a little unclear about stock options,” Sherman said on the House floor Friday. “That it will prohibit leasing the corporate jets, but will allow the companies to charter the corporate jets; and that it will put limits on bonuses but no limits on salaries.”
Congress last year approved a $700 billion bailout of the finance industry after the Bush administration vowed to use the cash to buy up the the toxic, mortgage-backed securities obtained by many firms in recent years. The White House, however, didn’t go that route. Instead, the Treasury injected the cash directly into the banks to thaw the credit freeze — an effort that has yet to bear fruit. To access the second half of the bailout cash, the White House requires congressional approval.
On Friday, House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced legislation placing tougher conditions on how the second $350 billion of Wall Street bailout cash is spent. Frank’s bill would adopt the executive-pay restrictions of the automaker-bailout bill that passed the House last month, including a prohibition on bonuses to the 25 top-paid employees and a ban on ownership or leasing of private aircraft.
Frank’s proposal also bars payments to executives receiving enormous retirement packages — the so-called golden parachute deals — but only for the period when the company is receiving taxpayer funds. That is, golden parachute arrangements negotiated before a firm began taking TARP funds could proceed later.
Additionally, while the golden parachute restrictions do not apply, under the current TARP law, to companies receiving less than $300 million in federal help, the Frank bill eliminates that $300 million floor.
Speaking to reporters Friday, Frank said his bill goes further to limit executive compensation than even the economic team of President-elect Barack Obama wanted, “but they understand that we’re telling them what is necessary to get legislation through.”
House Speaker Nancy Pelosi (D-Cal.) applauded Frank’s effort, citing “stronger” executive-pay provisions that “will close loopholes so that taxpayers are protected.”
Sherman, however, isn’t convinced the reforms would be effective. A member of the Financial Services Committee, Sherman hopes to apply stricter executive-compensation restrictions during this week’s debate.
First, Sherman points out, the Frank bill — like the Detroit bailout proposal — places no limits on executive salaries. (While the Big Three CEOs famously said they would accept annual salaries of $1 if Congress would bail them out, that move was voluntary.) Frank’s TARP-reform bill limits bonuses and “incentive compensation,” but not salaries.
Second, Sherman claims the bill is “ambiguous” about whether executives of bailed-out banks would remain eligible for unlimited stock options. A company that considers such options to be “salary,” for example, might elude any cap on their dispersal. “The creativity of the corporate world is enormous,” he warned on the House floor.
With stock prices down to historic lows, Sherman points out, executives could reap “hundreds of millions” if the stocks rebound, lending executives a windfall if a company recovers as a result of the taxpayers’ largesse.
Finally, Sherman criticized the ban on owning or leasing aircraft, arguing that companies will simply begin to charter their jets. Fleets of limousines, he said, should be prohibited as well.
Sherman is working on legislation that would close the mentioned loopholes. His proposal would cap executive pay at $1 million per year, including salaries, bonuses, pensions, stock options — everything. Citing the $1 salaries urged of the auto executives, Sherman said in a phone interview Friday that, “I’m a million times more generous than that.”
Recent reports indicate that there’s good reason for Sherman’s concerns. In November, American International Group (AIG) announced plans to pay out $503 million in deferred compensation to top executives at a time when the Treasury had already committed $152 billion in taxpayer funds to prevent the insurance giant from going under. Morgan Stanley, which has received no less than $10 billion in bailout funds, paid out $2 billion in bonuses this year, according to The New York Times. Goldman Sachs, another beneficiary of billions in TARP funds, reportedly rewarded some employees with $200,000 cash bonuses.
Tales such as these prompted Sen. Charles Grassley (R – Iowa), the highest ranking Republican on the Senate Finance Committee, to urge state attorneys general to invoke local laws to rein in what he called “excessive” payments to top employees of bailed-out banks.
Frank told reporters Friday that the Financial Services Committee would hold a hearing on his bill Tuesday, with hopes of bringing the legislation to the House floor Wednesday. Sherman, a member of Frank’s panel, was hopeful there would be a vote on his amendment in one of the two forums, but he wasn’t holding his breath.
“We’re concerned,” he said, “that it may not be marked up.”
Unaltered, Sherman said, the Frank bill presents a dilemma for lawmakers who think it doesn’t go far enough to rein in executive pay, even as they recognize that it’s much better than the TARP bill as it currently stands. “Do you vote for a bill that isn’t good enough?” he asked.
The California Democrat suggested that there could be a number of Democrats, himself included, who would vote for Frank’s reform bill, but later oppose the release of TARP’s remaining $350 billion.
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