Obama Orders Pay Limits at Banks Getting Future Aid

Feb. 4 (Bloomberg) -- President Barack Obama called bonus payouts at banks getting rescue funds “shameful” as he and Treasury Secretary Timothy Geithner announced the government will require financial companies getting aid in the future to cap compensation of top officials at $500,000 a year.

“To restore our financial system, we’ve got to restore trust,” Obama said at the White House as he set out new rules for companies that seek “exceptional” assistance from the Treasury. “And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.”

Geithner said the economic crisis has been “made worse by a loss in faith” in the judgments of executives.

“There is a deep sense across the country that those who are not responsible for this crisis are bearing a greater burden than those who were,” he said, adding that he will outline a “comprehensive” program for stabilizing the financial system next week.

Obama also urged Congress to finish work on economic stimulus legislation, saying that a failure to act “will turn crisis into a catastrophe and guarantee a longer recession.”

Congressional Support

The new conditions won support from Democrats and Republicans in Congress, who say they’ve been getting angry calls and mail from constituents over bonuses paid to bankers being rescued by the government. Several lawmakers said they may pursue even greater restrictions.

“If anyone is looking for the taxpayer to help bail their company out, these type of executive pay caps are appropriate,” House Republican leader John Boehner said.

Democrat Christopher Dodd, chairman of the Senate Banking Committee, said reports about executive pay and bonuses are “infuriating” the public.

“Americans understand a lot of things about this whole process, but one of the things they don’t understand is how it is their money is going to institutions that are simultaneously rewarding executives with outrageously big levels of compensation,” he said.

Senator Claire McCaskill, a Missouri Democrat who proposed legislation last week to cap executive compensation at $400,000 a year, said today that Obama “is on the right track.” She said she still will try to attach her proposal to the economic stimulus legislation being debated in the Senate.

‘Right Direction’

Representative Adam Putnam, a Florida Republican, said Obama’s action is “a step in the right direction.” He called the $500,000 limit “a good start; it may need to be lower.”

While executive pay would be limited under the administration’s plan, there are provisions that would allow additional compensation in the form of restricted stock that can’t be sold until taxpayers have been paid back with interest. Senior executive compensation plans also must be submitted to a non-binding shareholder resolution.

The compensation cap may be waived for companies getting aid through what the administration terms “generally available capital access programs,” through full public disclosure and submission of a resolution to shareholders if requested.

Companies also must have in place provisions to reclaim, or “claw back,” bonuses and incentives from the top 25 senior executives if they are found to engage in deceptive practices.

Golden Parachutes

The terms announced today also expand the ban on “golden parachute” severance packages to a company’s top 10 executives from five in existing programs. In addition, the next 25 executives would be prohibited from getting severance greater than one year’s compensation.

The rules won’t be applied retroactively to companies that already have received “exceptional” aid from the Treasury Department through the $700 billion Troubled Asset Relief Program, such as Citigroup Inc. and American International Group Inc. The limits would be applied if those companies seek a fresh round of assistance.

The restrictions are aimed at top executives who make decisions for the company, according to an administration official who briefed reporters after the president spoke. The $500,000 limit was arrived at based on language in the original TARP legislation and tax law, the official said.

The number of executives covered by the compensation limit would be determined on a case-by-case basis and set out in a contract for the aid.

Disclosure Requirements

The administration also is imposing conditions that it says would force companies to disclose more about expenses such as corporate jets, office renovations, entertainment and holiday parties.

White House press secretary Robert Gibbs said such “‘name and shame’ provisions” would have as much impact as regulations on correcting corporate behavior.

He cited the publicity and subsequent outcry that caused Citigroup’s retreat on the purchase of a $50 million corporate jet and by Wells Fargo & Co. to cancel a four-day event in Las Vegas. Citigroup got $45 billion through TARP and Wells Fargo received $25 billion.

While TARP is directed primarily at financial firms, the restrictions would apply to any company that seeks new government aid. That includes automakers General Motors Corp. and Chrysler LLC, which were approved for a total of $17.4 billion in loans from TARP funds in December, the official, who spoke on condition of anonymity, said. That contract set out limits on compensation and the new restrictions would apply only if they seek assistance again.

Bonus Report

Outrage among the public and lawmakers has been building since October, when Congress passed the rescue plan for financial firms. Lawmakers complained that the $350 billion first half of the fund was doled out with little public accounting of how the money was spent. A New York state comptroller report that $18.4 billion in bonuses were paid to Wall Street executives and employees as the U.S. sank into a recession further inflamed Americans.

“For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy, and I will not tolerate it as president,” Obama said.

The compensation restrictions announced today are part of a wider White House plan to overhaul rules governing the remaining $350 billion in TARP money, free up credit markets and tighten regulation of financial markets.

New Strategy

Geithner said he would outline a strategy next week. He met privately with House and Senate Democratic leaders at the Capitol this afternoon.

On Wall Street, there is concern that compensation curbs would hinder a company’s ability to attract top-notch employees, and that would lead to a talent drain, Meredith Whitney, an analyst at Oppenheimer & Co., said on Bloomberg Television.

“If you cap compensation, the best and the brightest are still going to figure out a way to make money, and it may not be on Wall Street,” Whitney said.

William Cohan, a former investment banker at Lazard Ltd. and JPMorgan and author of “The Last Tycoons” about Lazard, disputed that notion.

“What do they do? They push paper around,” Cohan said, “Where else can you get paid $500,000 to do that?”

Measuring Performance

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said this week that it’s wrong for politicians to criticize Wall Street pay without differentiating between companies where compensation is commensurate with performance.

“It’s unfair to talk about us as one,” Dimon, who was paid $1 million last year and didn’t accept a bonus, said at a conference in New York. “Not every company was responsible.”

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. awarded their employees a cumulative $145 billion in bonuses from 2003 through 2007, according to estimates based on company reports.

That is more than the annual gross domestic product of the Philippines. Lehman has since gone bankrupt, while Bear Stearns and Merrill have been taken over by commercial banks.

Wall Street firms’ pay has traditionally been tied to performance of the companies. As the bonus portion of employees’ pay has grown, many started to expect it regardless of performance. Some employees have been receiving incentives “for basically turning up,” Barclays Plc Chairman Marcus Agius said last week at the World Economic Forum in Davos.

As the public outcry over Wall Street pay escalated, top executives at Morgan Stanley, Bank of America Corp., Goldman Sachs and Citigroup have agreed to forgo bonuses. Governments in the U.K., Switzerland and France have pressured banks, including UBS AG and Royal Bank of Scotland Group Plc to limit executive pay after taxpayer-funded bailouts.