Flying in the face of Congress and both presidential campaigns, Treasury is resisting efforts to impose pay limits on Wall Street executives and bankers whose companies stand to be helped by the government’s $700 billion rescue plan for the financial markets.
As markets reopen Monday, the issue is a surprising flashpoint between Treasury Secretary Henry Paulson and House Democrats, who have drafted a bill giving Paulson much of what he wants but requiring that Treasury also demand “appropriate standards for executive compensation.”
Treasury argues that the requirements will make it harder to convince companies to sell their troubled assets to the government. But Democrats, who otherwise admire Paulson, say that the former Goldman Sachs chairman is blind to the politics of the situation and the huge divide between the average taxpayer and the financial world now seeking relief from bad debts that have clogged the credit system—and threaten the entire economy.
A senior aide to John McCain, the Republican presidential nominee, told Politico Sunday that the Arizona senator also favored compensation limits as part of the package, as does the Democratic nominee, Barack Obama, according to a campaign spokesman for the Illinois senator.
The House Financial Services Committee, which shared portions of its bill with Treasury Sunday, still expects to move ahead with floor action later this week. And the outcome could be influenced by how the administration reacts to a second Democratic priority: a year-end spending bill that includes more than $36 billion in emergency appropriations to finance disaster aid, fuel assistance for the poor and loans for the auto industry.
As now drafted, the stop-gap bill would cover most domestic agencies through next March 6 while giving full-year funding to the Departments of Veterans Affairs, Homeland Security and possibly Defense. The two largest pieces of the emergency money are about $24 billion in disaster assistance and $7.5 billion to finance $25 billion in direct loans to help the “Big Three” automakers retool plants to produce more energy efficient vehicles.
Democrats are hoping for some give by the White House budget office in return for their support of the much larger Treasury package. But leaders in both parties are worried by defections on the left and right, and the path for Treasury through the Senate could take longer.
In the House, Paulson benefits from his close working ties with Rep. Barney Frank (D-Mass,) chairman of the Financial Services panel. But relations have never been as good with Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, making it harder for Banking Chairman Christopher Dodd (D-Conn.).
In a statement made available Sunday night, the Alabama Republican’s office said: “Sen. Shelby remains at this point unconvinced that Treasury’s proposal strikes a balance between the interests of the taxpayer and the economy. He has concerns regarding the efficacy of the plan, and whether it would reward Wall Street while doing nothing for homeowners or for local financial institutions that are also a key segment of our economy. He will continue to work with Chairman Dodd to see whether there is a way forward.”
As a Wall Street veteran, Paulson admits his own anger at the situation taxpayers have been forced into by the debt crisis—triggered by the collapse of housing prices but also a history of reckless practices by major investment banks. But the secretary says he wants to avoid “punitive” steps even as he presses Congress for quick action on the massive government intervention.
Given Paulson’s urgency, Democrats have been more surprised that the executive compensation language has been such an issue. Neither Frank nor Speaker Nancy Pelosi (D-Calif.) show any sign of backing down.
“Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” Pelosi said in a statement late Sunday. "We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome. Democrats will act responsibly to insulate Main Street from Wall Street.”
Language forwarded to Treasury Sunday by Frank’s panel would block future executive bonuses paid to encourage risky investments and also attempts to recapture—via a “claw back” provision-- any incentives paid in the past based on “earnings, gains or other criteria” that proved to be false.
Paulson is given some discretion to judge what is deemed “inappropriate or excessive.” And in the case of severance pay and golden parachutes, the bill imposes no dollar ceiling; instead, the secretary would be charged with setting limits “as determined to be appropriate in the public interest in light of the assistance being given to the entity.”
Apart from executive pay, the two other major demands by Democrats are greater oversight of how the $700 billion is used and some certainty that the government will use its new leverage in the mortgage market to help homeowners facing foreclosure.
Frank’s draft bill would have the Comptroller General establish “a permanent presence” in the offices of the Treasury-run program. And the Government Accountability Office “shall be afforded full facilities for verifying transactions and retain copies of such books, accounts, and other records” as it deems appropriate.
To mitigate foreclosures, the Treasury would be required to use its new investment powers to “maximize assistance to the underlying mortgagors” and also coordinate with federal banking and housing agencies toward the same goal. The assumption is that, as Treasury buys up more troubled mortgage related assets, it will have more power “to encourage the servicers of the underlying mortgages” to write down the debts and thereby allow homeowners to find government-insured refinancing through the Federal Housing Administration.
Appearing on ABC’s “This Week” Sunday, House Republican Leader John A. Boehner said, “This is not a time for ideological purity.” But both parties can’t ignore defections on the edges.
Conservatives loathe the $700-billion price-tag. Liberals resent the call to rescue Wall Street from its own excess. And neither side wants to transform private risk into taxpayer debt.
Opposition over the weekend came from Sen. Bernie Sanders, a Vermont independent on the left, and prominent conservatives like Rep. Mike Pence (R-Ind.) and former Speaker Newt Gingrich. “Congress had better ask a lot of questions before it shifts this much burden to the taxpayer and shifts this much power to a Washington bureaucracy,” Gingrich wrote in an essay posted on the National Review website.
Pence’s stand is important given his status as potential future leader—and Boehner rival-- in the Republican caucus.
When asked about Pence, Boehner said, "If this were about a company here or there failing, I wouldn't be for intervening in any way shape or form. This is about our way of life, our society, our economy….This isn't about Wall Street."
But later a Boehner aide pointed out that he hadn’t yet committed to the House bill until he sees the full package demanded by Democrats.
In a statement released past midnight Monday morning, the Ohio Republican urged Democrats to have their final plan up on the Internet at least 24 hours before House action, and looking forward, Boehner suggested a new Joint Select Committee should be created in Congress to oversee the intervention.