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Wall Street Journal, February 14, 2009 article


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FEBRUARY 14, 2009

Bankers Face Strict New Pay Cap
Stimulus Bill Puts Retroactive Curb on Bailout Recipients; Wall Street Fumes

WASHINGTON -- The giant stimulus package that cleared Congress Friday includes a last-minute addition that restricts bonuses for top earners at firms receiving federal cash -- including those that already received it -- more severely than the Obama administration's previous pay limits.

The most stringent pay restriction bars any company receiving funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.

As word spread Friday about the new and retroactive limit -- inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.

   Pay Plan

  • Companies that have received federal bailout funds can't pay top earners a bonus equal to more than one-third of their total annual pay.

  • For example: An employee with $1 million pay could receive a bonus of no more than $500,000. That figure equals one third of the $1.5 million total pay.



The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.

In contrast to executive-pay rules announced recently by the White House, those in the stimulus bill -- which cleared the House and Senate Friday and is headed to the White House for President Barack Obama to sign into law -- doesn't apply just to top executives but could reach into the ranks of highly paid traders and department heads. The rules apply to any company that has received aid under the bailout program since it began in October.

The number of a company's employees affected increases on a sliding scale, depending how much federal money the firm receives. More than 350 banks have gotten funds from the government's formal investment program. In addition, the government has proffered aid to insurer American International Group Inc., to auto makers General Motors Corp. and Chrysler LLC, and to Citigroup Inc. and Bank of America Corp.

In speaking to Mr. Dodd, Messrs. Geithner and Summers also expressed concern over another provision he inserted that lets banks and other aid recipients pay back aid more easily. It says banks would no longer have to raise new private capital to replace the government's funds in order to repay it. Some government officials fear the result could be that banks lose their capital cushions and thus become even more wary of lending.

Sen. Dodd said in a statement that "the decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy.... With vigorous oversight by the Treasury Department and by Congress, these tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses."

With so much riding on the stimulus bill, President Obama is expected to sign it despite his concerns. The pay-limit language in the stimulus bill is vague and open to interpretation. It isn't clear, for example, whether the value of stock options should be included in the calculation of total compensation. The provision could be altered somewhat by the Treasury, which would be in charge of implementing the regulations.

A White House spokesman said, "As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers. He looks forward to working with Congress to responsibly address this issue. Members of the administration contacted members of Congress with suggested technical changes toward that end."

Congressional aides said the bonus provision means an executive could receive a bonus equal to as much as 50% of salary. For instance, a $500,000 bonus for someone with a $1 million salary would meet the test because the bonus would make up no more than a third of the person's $1.5 million in total compensation.

Under the bill, bonuses can be paid only in restricted stock, which recipients couldn't cash in until the Treasury is repaid.

Bank of America Corp. CEO Kenneth D. Lewis was paid $16.4 million in 2007, of which just $1.5 million was in salary, according to company filings. The rest included $11.5 million in bonus, stock-option awards and restricted stock. Assuming the same salary level, Mr. Lewis's 2009 pay under one interpretation of the stimulus legislation would be limited to about $2.25 million. The bank declined to comment. J.P. Morgan Chase & Co. CEO James Dimon earned $1 million in salary in 2007, but his total pay was more than $30 million, almost all in incentive-based bonus and awards of restricted stock. Many Wall Street bosses, including Messrs. Lewis and Dimon, chose to forgo their bonuses related to 2008 performance. But others further down in their banks could find their future pay packages much slimmer than they expected.

The bill carves out an exception for those whose employment contracts require payment of an annual bonus. Some top finance-industry executives don't have contracts; the language in others' agreements may or may not exempt them from the restrictions.

The limits build on executive-pay rules announced earlier this month by the Obama administration. Those include salary caps for certain firms receiving capital injections in the future from the Troubled Asset Relief Program. These rules would set a $500,000 cap on executive pay at firms that accept "extraordinary assistance." So far, no firm has fallen under this limit. The Obama rules have looser salary caps for firms that get more-general aid.

The Dodd rules don't mention salary caps and concentrate instead on incentive-based pay.

The stimulus bill says that for companies that receive more than $500 million in federal money, as many as 25 executives can be covered by pay limits. The numbers ratchet down for banks that received smaller sums.

Language in the contracts banks signed when banks took money from the TARP allowed the government to change terms retroactively. Still, "I'll bet you will see in the next month or so, banks paying back the government," said Alan M. Levine, an executive-pay attorney at Morrison Cohen LLP in New York. "They don't want to run their business under these restrictions."

President Barack Obama speaks to business leaders in the East Room of the White House in Washington, Friday, Feb. 13, 2009.

Mr. Levine said the bonus restrictions could result in companies shifting more pay for top officials to salaries, away from incentive-based pay. Corporate-governance advocates seek to move in the opposite direction.

Another stimulus-bill provision requires the Treasury Secretary to examine Wall Street and bank bonuses paid last year and early in 2009 to determine if they were in the public interest. The government could try to claw back any bonuses deemed excessive. The provision would apply to any firm that got bailout money.

The bill also requires a nonbinding shareholder vote on executive pay at firms receiving bailout funds.

Among the administration's biggest concerns is the stimulus-bill provision that allows any firm receiving government money to repay it without raising a similar amount of money from private sources. The Treasury now requires banks getting cash from the capital-injection program to keep it for three years or raise private capital to replace it.

Some banks, such as Goldman Sachs Group Inc., have said they want to repay the U.S. as soon as possible but haven't raised private funds to do so. The legislation removes that obstacle. But a congressional staffer said repayment would be done in consultation with a bank's primary regulator, which has authority to order a bank to raise more funds if its capital cushion is too low.

Lobbyists and executives at big banks have been discussing the pay restrictions with Sen. Dodd's office and Treasury officials, one senior bank executive said. The executive said banks are confident the provision's details can be tweaked during the Treasury's rule-making process. Banks' hope, the executive said, is to modify the provision's language so that it applies only to members of companies' management committees or comparable decision makers.

Meanwhile, executive payments authorized by Merrill Lynch & Co. and its owner, Bank of America, are the subject of a new investigation, from North Carolina Attorney General Roy Cooper. He has asked for information about payouts authorized by Merrill before Bank of America bought it and separate bonuses authorized by Mr. Lewis and his board last month.

New York Attorney General Andrew Cuomo, who is also investigating the matter, alleged this week that Merrill "secretly" moved up the date for awarding bonuses and said the total was $3.6 billion, including $121 million to four top executives. Mr. Cuomo alleged Bank of America had "apparent complicity" in the awards. Bank of America has said it urged that Merrill's 2008 bonuses to be reduced but that this was Merrill's decision.

The North Carolina AG sent Bank of America's board a letter this week after Mr. Lewis told the House Financial Services Committee the bank would start awarding bonuses Feb. 15. Mr. Cooper has asked the bank to disclose the totals and also details of Merrill bonuses awarded in December.

Bank of America said it is cooperating with the inquiry and that bonuses for 2008 were reduced by an average of more than 60%, with Mr. Lewis and those who report directly to him receiving none.

óDavid Enrich and Dan Fitzpatrick contributed to this article.


Printed in The Wall Street Journal, page A1

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