Limiting Banker Bonuses Could Backfire

By Tomoeh Murakami Tse, Binyamin Appelbaum and Lori Montgomery
Washington Post Staff Writers
Sunday, February 15, 2009

Congressional leaders debated the proposals, the banking industry lobbied intensely against them and President Obama's top economic advisers even put out last-minute calls for revisions. But in the end, new rules to significantly curb compensation of the banking industry's top executives and rainmakers were tucked into the 1,073-page stimulus bill now making its way to Obama for his signature.

The pay restrictions, which go much further than limits proposed by the Obama administration 11 days ago, were the product of forceful negotiations, careful diplomacy and give-and-take that lasted into the night Thursday before Congress passed the stimulus package Friday, according to interviews with officials in the banking industry, on the Hill and in the Obama administration.

In better times, such stringent rules -- a bonus cap and a ban on golden parachutes -- would have had little chance of becoming law. But now, outraged taxpayers called upon to bail out the industry are driving the decades-old debate on extravagant Wall Street paydays.

The chief concern for the Obama administration, White House officials said yesterday, was that the provisions would prompt financial institutions to do whatever they can to pay back the government funds, undermining its efforts to stimulate lending and coax the economy into recovery. Despite those concerns, White House officials last night said Obama would sign the bill Tuesday during a trip to Denver.

The new restrictions, written by Sen. Christopher J. Dodd (D-Conn.), include a provision that would allow the banks to more easily return the government investment.

Under terms of the Troubled Assets Relief Program put in place last fall, financial institutions that want to leave it within three years would have to raise the money by offering new company stock to investors. That could pose a large hurdle, as investors fearful of further deterioration in the economy have stayed clear of financial stocks.

The bill would remove that restriction. Now the money can come from anywhere. The provision was added in response to concerns that it was unfair to change the rules for banks that already took federal aid.

Dodd's original plan called for restrictions on bonuses paid to the top 25 employees at all 359 financial institutions receiving government funds. Administration officials said they worried that such a sweeping rule could dissuade smaller community banks from taking government aid.

So Treasury Secretary Timothy F. Geithner and White House economic adviser Lawrence H. Summers quickly got in touch with Dodd.

Dodd declined to honor the administration's first request to remove the language that made it easier for banks to return the money. But he accommodated them on the second, administration officials said. So a tiered approach to the bonus limit, the most stringent of the new pay restrictions, was written into the bill. It would apply to a varying number of employees at each firm, depending on how much money the firm has taken from the government.

At banks receiving less than $25 million, limits would apply to only the highest-paid employee -- the chief executive. For those receiving between $25 million and $250 million, the restriction would apply to the five most highly-paid employees. At firms getting more than half a billion dollars, which would include all of the Wall Street giants, the rules would apply to the top five executives and the 20 highest-paid employees.

Under the new rules, bonuses for executives at all financial institutions receiving government funds are limited to no more than a third of their annual compensation. The bonuses must be paid in company stock that can be redeemed only after the government investment has been repaid.

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