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.
The rules issued by the White House, which capped executive pay at $500,000, allowed companies to award unlimited stock and applied only to institutions that receive government funds in the future and under limited circumstances. Dodd's rules have no caps on salary, leading critics to say they could prompt companies to change the way they pay, but not necessarily reduce the amount.
Meanwhile, the banking industry's pleas to exclude nonmanagement employees from the bonus restrictions went unheeded. Banking executives are concerned that their top salespeople, such as traders who bring in hefty sums for the company and whose pay can reach tens of millions of dollars, would flee to rivals such as hedge funds and foreign banks that have not accepted U.S. government funds.
"These bonuses are meant to be performance-based, but too often Wall Street executives took too many risks and made decisions for short-term gains, rather than long-term viability," Dodd said. "A car mechanic or teacher in Bridgeport, Connecticut, should not be paying to subsidize bonuses for their bad decisions."
Administration officials say they think the Treasury has room to clarify the provisions to ease the impact on the government lending program. On the payback provision, for instance, the language in the bill calls for any repayment to be done in consultation with a bank's primary regulator. Two industry lobbyists said yesterday they are reaching out to officials to seek the best possible interpretation of the rules.
The increased restrictions have led a growing number of bankers to grumble that they regret accepting federal aid and want to pay it back as soon as possible so they can be clear of the restrictions. But the new rules are unlikely to cause a mass exodus of financial institutions from the government lending program anytime soon. Most executives are stuck. They needed the money and cannot afford to repay it.
"We'd like nothing better than to pay it back early," Bank of America chief executive Kenneth Lewis told Congress last week. But the company, which has taken two rounds of government aid totaling $45 billion, would be hard-pressed to raise the necessary money from private investors. Its market value is about $36 billion, and it is losing money.
"You still have to come up with the capital -- and that's a lot of money," one banking industry executive said yesterday. The provision is "not a clear-cut glide path to returning the funds. I don't anticipate companies who took large shares of TARP seriously considering utilizing this option for at least 18 months."
A senior bank executive at another recipient of government aid said he also was eager to repay the government, and his company's board now would decide how quickly to move. The executive, who spoke on condition of anonymity, said the company would not repay the government simply to remove a constraint on executive pay. But, he said, the company was concerned about the broader pattern of government interference and eager to assert control over its own affairs.
David Viniar, the chief financial officer of Goldman Sachs, said at a conference last week that the firm would like to repay quickly, in part because of the restrictions on compensation. "Operating our business without the government capital would be an easier thing to do," Viniar said. "We'd be under less scrutiny and under less pressure."
Repayments from relatively strong companies such as Goldman Sachs could create a new problem, by making repayment a test of corporate health, with companies that don't repay the money weakened in the eyes of investors. That would further undermine the already tenuous idea that the federal aid is focused on healthy banks.
Avoiding such a situation is a key reason the original legislation set strict limits on repayment, officials have said.
The new rules require banks to consult with the Treasury before repaying the government's investment, but some of the healthier firms that were pressed to show solidarity by accepting initial investments say they feel betrayed by the new restrictions. That may make it harder for officials to deter those companies from repaying the money.
The executive who asked to remain anonymous said he fully expected the Treasury to ask his company to defer repayment, but he was no longer inclined to listen.