Bank Program Reignites Debate on Executive Pay

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, October 14, 2008

The decision to devote some of the $700 billion financial rescue for direct cash infusions into banks has reopened the rift over whether financial institutions that get federal help should abide by executive pay limits.

Treasury officials have argued privately that banks aided this way should be exempt from the toughest executive pay restrictions in the rescue legislation passed by Congress.

Some lawmakers disagree.

"Restrictions on executive compensation will ensure that taxpayer money is not wasted enriching the same people whose poor decision-making created this crisis," Sen. Charles E. Schumer (D-N.Y.) wrote to Treasury Secretary Henry M. Paulson Jr. yesterday. "It is imperative that these restrictions, including limitations on the incentives for executives to take excessive risks and the elimination of golden parachutes, should apply to any capital injection program."

Exempting the banks in the program is "not in the spirit of the thing," said Rep. Spencer Bachus, (R-Ala.), ranking member of the Financial Services Committee.

Treasury officials declined to comment on their position yesterday.

Under the initiative, the federal government will give cash to banks in exchange for an ownership stake. The Treasury Department is proposing to spend up to $250 billion of the $700 billion this way.

The lawmakers included the pay restrictions amid fears that some high-paid executives whose high-risk tactics precipitated the credit crisis could continue to be rewarded.

The legislation setting up the $700 billion expenditure essentially sets up two levels of executive pay restrictions: one that is strict, and one relatively lenient.

The stricter set of requirements requires "limits on compensation," forbids the payment of golden parachutes and allows banks to recover executive bonuses from executives if earnings have been misstated.

The more lenient requirements merely forbid new golden parachute deals.

The Treasury has yet to detail what amounts to "appropriate standards for executive compensation," as the legislation calls for.

The question in dispute is which requirements -- the strict or the lax -- apply to the bank initiative.

While there is strong political sentiment in favor of punishing the executives and driving tough deals with the financial institutions, imposing tough requirements on the banks for executive pay could mean that fewer banks will choose to enroll in the program, officials have said. Some of the nation's largest banks were told by Paulson yesterday that they had to participate in the program for the good of the country, bank executives said.

"I believe you have to thread the needle," Schumer said in an interview. "You can't make it too sweet but you can't make it too sour."

Staff writers David Cho and Lori Montgomery contributed to this report.

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