CHICAGO—President Obama recently strutted out new rules restricting “shameful” executive compensation packages at corporations receiving government funds, and followed up with populist tough-talk aimed at “a culture of narrow self-interest” on Wall Street.
Then Congress one-upped him.
Now Obama's signature $787 billion economic stimulus bill includes restrictions to executive compensation that go much further than the ones he made a show of announcing just ten days ago—and that ended up in the final bill over his administration’s strong objections.
The new rules, introduced by Sen. Chris Dodd (D-Conn.) mark one of the major concessions Obama made in the last days of wrangling over the stimulus package he is expected to sign into law on Tuesday in Denver.
But the administration, which pushed hard for a stimulus bill to pass by this weekend, doesn’t see this as the end of the discussion.
Noting that Obama “shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers,” spokeswoman Jen Psaki said the president “looks forward to working with Congress to responsibly address this issue.”
Psaki added that administration officials had contacted members of Congress with suggested changes to the restrictions, which sharply curtail executive bonuses at banks receiving bailout funds, and will affect many more companies and employees than the rules Obama and Treasury Secretary Timothy Geithner announced on February 4.
The tougher rules that passed in Congress were no last-minute surprise. Dodd talked them up in a February 5 press release, and in another released on Thursday, just hours before the bill was filed. The rules were debated in the Senate.
Administration officials were at the forefront of some heavy lobbying against them, arguing that they could encourage executives to leave for much higher-paying jobs at firms that hadn't received government funds, and ultimately slow the flow of credit by creating an incentive for banks to repay bailout funds before they have enough capital of their own with which to provide loans.
Dodd responded to the criticism of the restrictions in a statement to Politico on Saturday evening.
"The current job market should deter employees from leaving, and if they do, there are many qualified replacements," he said.
"In addition, federal regulators have broad supervisory authority to require banks to keep appropriate levels of capital. The banks are subject to strict supervision, so the Treasury Department and bank regulators will be able to determine well in advance if a bank's departure from the program would result in problems to the system."
Noting that taxpayers are upset about excessive compensation at firms receiving government funds, Dodd added, "These modest changes are about restoring their confidence. I plan to continue to monitor the TARP program closely, including these new provisions."
While the administration's proposal included a $500,000 cap on executive pay at companies receiving bailout funds, the bulk of executive pay at financial firms is often collected via bonuses.
Administration officials, most notably Geithner and Larry Summers, the president’s chief economic adviser, had urged congressional members not to include the tougher rules in the stimulus package, warning that they could have an adverse impact on the economy, according to an administration official.
The administration won some concessions, such as the implementation of the restrictions on a sliding-scale based on how much bailout money a company receives, according to an administration official. But the rules in the bill are much tougher and father-reaching that those the president had proposed.
While the exact impact of the restrictions is unclear, the financial services industry pushed hard against them, and warned both Congress and the Obama administration of a potentially dire impact on the already troubled financial system if they were adopted.
Banking executives say the new soon-to-be law could cause executives to defect to hedge funds or foreign banks that have not received funds from the government’s Troubled Asset Relief Program, known as TARP.
“The ban on commissions will limit the ability of TARP recipients to attract and retain qualified salespeople,” Scott Talbott, a chief lobbyist for the financial services firms, wrote in an email. “This will make TARP companies less competitive.”
One of the key differences between the stimulus bill and the Treasury rules Obama proposes is that the stimulus bill restrictions apply to all financial institutions that receive bailout funds, not just those that receive “exceptional assistance” from the government, as required in the Treasury rules, a threshold that no company has yet reached.
Additionally, the rules in the stimulus bill apply not only to companies that receive bailout funds in the future, but also to those that have received TARP money in the past – although executive bonuses doled out in contracts signed before February 11 would not be impacted.
Under the new restrictions, top executives can only collect bonuses no larger than one-third of their annual salary. And those bonuses must be given in the form of restricted stock options that executives could not cash in on until their company’s bailout money was repaid to the government – a provision that shows traces of Obama's influence, as it’s similar to a rule in the Treasury plan.
In terms of how many executives would be impacted by the rules in the stimulus bill: the restrictions would only apply to the highest-paid employee for companies receiving less than $25 million in government funds, but they would impact senior executives and at least the 20 next most highly paid employees at companies receiving $500 million or more in TARP funds.
“My sense is TARP-backed companies will become the new civil service,” Joel Kotkin, a senior fellow at the New America Foundation, wrote in an email.
The tough restrictions on Wall Street extravagance, the likes of which almost always strike a positive cord among the public, could be a political boon for Dodd. The chairman of the Senate Banking Committee, he is expected to face a tough re-election effort in 2010.
But yet new restrictions in Washington tend to be quickly followed by revelations of loopholes.
Added Kotkin, “I have to believe this will be circumvented in some way.”
Harry Siegel contributed to this report.