Bankers Press Case Against Punitive Tax

By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, March 21, 2009

An alarmed banking industry looked for friends in Washington yesterday as it tried to head off severe congressional restrictions on compensation, fearful that a wave of popular anger about vast paydays will result in permanent damage to the industry.

After a week of unexpected setbacks for an industry accustomed to deference, bank executives said they were now racing to convince Congress and the Obama administration that imposing punitive taxes on bonuses would unfairly punish thousands of people for the sins of a few. Executives also argued that hitting banks would hurt the broader economy.

"We are working in every appropriate way with policymakers in Washington, and with other financial institutions and industry associations, to come to agreement on a constructive industry compensation system that is good for the company, the financial system and the country," Citigroup chief executive Vikram Pandit said in a memo sent to employees.

The stakes are especially high because the Treasury Department is moving ahead with a critical initiative that involves persuading private investors to buy troubled assets from banks. The administration, which could unveil more details of this plan as early as Monday, is deeply worried that investors will be afraid to participate, Treasury officials say.

The Treasury plan would include three primary components, drawing on resources from the Federal Deposit Insurance Corp., the Federal Reserve and private investors, officials say.

Congress remained at a fever pitch, with several members issuing new demands that various companies rescind various bonuses. Long-simmering anger about lavish paydays on Wall Street has erupted since the disclosure last weekend that American International Group, bailed out by the government, still had paid $165 million in new bonuses to the company's most troubled division.

But there were signs that others in official Washington were more sympathetic to industry concerns. Two of the nation's senior banking regulators indicated in speeches that compensation should be tied to performance, the point of bonuses.

Fed Chairman Ben S. Bernanke said banks should structure compensation to reflect contributions to a company's health and profitability. He said problems arose when employees were rewarded for short-term results that created long-term risks.

"Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization," Bernanke said in a speech to the Independent Community Bankers of America.

FDIC Chairman Sheila C. Bair, speaking yesterday to the same group, said that some bankers deserved to be paid more depending on performance.

The Obama administration continued to offer measured comments. An official said that the White House will seek to recover the bonus payments from AIG, but in a manner that does not threaten the financial system. "The president has said repeatedly that he will do everything possible to recoup these bonuses -- it is not a matter of if he is in favor of it, but how and what the best vehicle is," the official said.

Many bank employees, particularly those who work in the capital markets and investment banking, get the majority of their annual compensation in the form of a lump-sum payment at year's end, a practice that is designed to tie pay to performance.

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