Treasury Clarifying Pay Rules for Bailed-Out Firms

By David Cho
Washington Post Staff Writer
Thursday, May 14, 2009

The Treasury Department may release as early as next week its long-awaited ruling on how to limit pay for executives at firms bailed out by the federal government, sources familiar with the deliberations said.

The effort poses a delicate political issue for the Obama administration, which has been working on the matter since mid-February. Officials are seeking to address widespread anger over lavish Wall Street pay without discouraging firms from participating in the government's financial rescue programs.

With the need to get several rescue programs up and running, senior administration officials have been pressing to give bailed-out firms clarity on how they can compensate their executives. At the same time, as part of their overhaul of bank regulation, the officials are engaged in separate discussions on a far more comprehensive reform of pay practices that would apply across the financial system.

The pay limits that apply to the bailed-out firms required legal clarification after Rep. Christopher J. Dodd (D-Conn.) crafted new limits and quietly attached them to the economic stimulus legislation just before it was signed into law by President Obama in February. At the time, some lawmakers were unaware of Dodd's tactic. The senator's new rules, which limit bonuses to one-third of an individual's base salary, trumped those in the $700 billion financial rescue legislation.

Administration attorneys have now been left with the task of reconciling Dodd's rules with earlier guidelines and explaining to firms how to apply the requirements. One official cautioned that the effort is complex and could take more than a week or two to finish. Justice Department attorneys are reviewing final drafts of the proposed limits.

The resulting guidance is likely to apply different pay limits to firms that participate in the federal bailout, a source said. Banks that have taken significant amounts of emergency aid will face the harshest measures. But senior Treasury officials have publicly said they do not want to put limits on private investors who voluntarily join government efforts to buy toxic assets.

Uncertainty over the pay restrictions has slowed some of the bailout initiatives. The issue, for instance, undercut a $15 billion Treasury program intended to free up credit for small businesses. None of the major small-business lenders was willing to participate because they did not want to submit to executive pay limits, among other restrictions, attached to federal bailout money.

Separately, as part of the government's upcoming overhaul of the financial regulatory system, officials have begun internal discussions about whether to revamp pay standards for all banks. Administration officials want to stem the practice on Wall Street of rewarding investors and executives who make highly risky bets. Instead, these government officials say, compensation should be tied to the companies' long-term health.

Federal Reserve Chairman Ben S. Bernanke suggested last week that compensation could be considered a "safety and soundness" issue. If the government made that determination, it would allow bank regulators to impose pay limits on financial firms without the need for new legislation by Congress.

Discussions on this broader effort are in the early stages and have included a wide range of officials, including senior policymakers from the White House, Treasury, Fed, and Securities and Exchange Commission, a source familiar with the matter said.

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