TARP puts a cap on pay, but some say it's not enough
It was tough to argue with Babe Ruth’s logic when, during his 1930 salary negotiations, he was challenged to say why he deserved a higher salary than President Herbert Hoover. The Babe’s retort was a straight shot out of the park: ‘I had a better year than he did.’
Wall Street firms aren’t in a position to make a similar argument against the $500,000 salary caps – roughly reflective of the current presidential salary – put on their executive compensation in exchange for Troubled Asset Relief Program (TARP) funding. Neither they nor the federal government can make much of a case for 2008 performance, unless someone wants to call a winner in a race to the bottom. At the same time, neither seemed to take seriously how much public indignation would be sparked as firms begged for taxpayer billions with one hand and distributed seven- and eight-figure bonuses with the other.
To be more precise, Congress seemed to get it: members were issuing statements of righteous indignation about bonuses as early as October. What the federal government actually did then, and what it’s doing now, to ensure there would be no cause for public outcry is a thread less easily disentangled.
Talking the talk
For example, in an October 31 statement regarding the initial TARP outlay, Representative Barney Frank, chairman of the House Financial Services Committee, said he was ‘deeply disappointed’ by those financial institutions that were ‘distorting the legislation’ by using funds for purposes other than lending. ‘Any use of the these funds for any purpose other than lending – for bonuses, for severance pay, for dividends, for acquisitions of other institutions – is a violation of the terms of the Act,’ he said. His choice of words raises the question of how great a distinction there is between violating ‘the terms of the Act’ and breaking the law.
In December 2008 the Government Accountability Office (GAO) released a 72-page report to congressional committees entitled ‘Troubled Asset Relief Program: Additional actions needed to better ensure integrity, accountability and transparency’. The report’s critiques included the following: ‘Treasury has not yet determined if it will impose reporting requirements on the participating financial institutions. Such requirements would enable Treasury to monitor, to some extent, how the infusions were being used. … Institutions participating in capital purchase program (CPP) must comply with certain requirements regarding executive compensation – for example, certain senior executives must repay any incentive or bonus compensation that was based on materially inaccurate financial statements. Treasury has not yet determined how it will monitor compliance with this or other requirements.’
So, were legislators reduced to barking and unable to bite because their legislation lacked teeth? Had Congress, in allocating funds and giving the Treasury carte blanche to manage them, set the stage for a massive money grab not designed to reinvigorate the economy?
The DiNapoli bombshell
That flicker of doubt turned explosive on January 28, when New York State Comptroller Thomas DiNapoli announced in a press release his office’s estimate ‘that the bonus pool paid by the securities industry to its employees in New York City totaled $18.4 billion in 2008.’ The release also noted that ‘TARP placed restrictions on bonuses for top executives and many have voluntarily forgone bonuses, but it did not impose limitations for lower-level employees.’
One week later the Treasury announced the $500,000 salary cap along with prohibitions against making large-scale termination packages and paying out stock options before TARP funds are repaid.
Congress professed itself to have seen the light, too. On February 13, Senator Christopher Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, issued a press release about his amendment, part of the final economic recovery bill, ‘to impose tough new limits on huge bonuses for executives working in firms that receive taxpayer funds. … These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.’ The release made an explicit point of stating that the amendment ‘cracks down’ not only on bonuses but also on ‘retention awards,’ a euphemism introduced by Morgan Stanley co-president James Gorman during a conference call made public by the Huffington Post blog.
However, Dodd’s own accounting of the highlights of the amendment refers only to restrictions placed on bonuses paid to the top 35 or so executives and employees. According to an accounting detailed in a letter sent to Frank by New York State Attorney General Andrew Cuomo, at Merrill Lynch alone those restrictions would have failed to cover most of those employees who received bonuses of: $8 million or more (20 people); $5 million or more (53 people); $3 million or more (149 people); and $1 million or more (696 people).
Capping it off
Some economists warned that those new Treasury measures also fail to hold up under scrutiny. Simon Johnson, who teaches global economics and management at MIT’s Sloan School of Management, is a co-founder of the economic watchdog website baselinescenario.com, and also a former chief economist of the International Monetary Fund. He had some harsh words for secretary of the Treasury Timothy Geithner during a February 13 interview on the PBS program Bill Moyers Journal.
His ire was directed at Geithner’s claim ‘that this $500,000 limit, and deferred stock, is some kind of restriction on what [the Wall Street firms] do.’ Johnson went on to explain, ‘It’s deferred stock, Bill. It’s not restricted. You can get as much stock as you want, as soon as you pay back the government, you can cash out of that.’ Moreover, Johnson pointed out, the firms are free to reset their stock option prices when they find themselves with ‘massive amounts of stock options that aren’t worth much anymore. … And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And … we and our children will be paying higher taxes so those people could have those bonuses. That’s not fair. It’s not acceptable. It’s not even good economics.’
The Obama administration and Congress will need to do more than appear to take those concerns seriously if they hope to win the support of economists and the public as the economic stimulus plan moves forward. Those who fear the government and the banking sector are routinely engaged in a game of nudge-nudge, wink-wink behind the taxpayers’ backs are all-too-ready to seize on evidence like the administration’s suspension of its rule against hiring former lobbyists in cases like that of Geithner’s chief of staff, Mark Patterson, who until April 2008 was vice president of government relations at Goldman Sachs.
Corporate officers and directors, too, will need to demonstrate increased sensitivity to stockholder and taxpayer concerns about compensation, especially where public funding has put taxpayers in the role of investors. No one wants to suffer a hangover as a consequence of someone else’s drunken spree. And no corporation that’s struggling to survive wants to find that its hour of need coincides with the moment when taxpayers, feeling defrauded once too often, decide it’s time to keep their wallets closed tight.
