Congress to Wall Street: 'Curb excessive pay and perks'
Treasury Secretary Henry Paulson warns of measures that could slow the bailout bill, but says, "I share your frustrations" on executive pay.
Perhaps no issue so roils the American public – deeply divided over proposed rescue plans for US financial markets – than the prospect of high-flying CEOs walking off with seven-figure severance packages while US taxpayers take on the burden of their failed decisions.
The Bush administration, led by Treasury Secretary Henry Paulson, urgently calls for a quick, clean bill to remove troubled assets from the US financial system – "and avoid slowing it down with other provisions that are unrelated or don't have broad support."
But in a break from his prepared testimony to the Senate banking committee Tuesday, Secretary Paulson added: "I've heard your comments on executive compensation, and I share your frustrations."
Before the federal takeover of mortgage giants Fannie Mae and Freddie Mac, chief executive officers Daniel Mudd (Fannie Mae) and Richard Syron (Freddie Mac) were on track for a combined $24 million in severance pay.
"In those cases, CEOs were replaced, golden parachutes were eliminated, strong action was taken," Mr. Paulson told the banking panel, still ad-libbing.
But many members of Congress – on the right, left, and center – say the proposed plan must include explicit assurances, covering all cases, that CEOs participating in the bailout won't keep unreasonable perks at the expense of taxpayers.
"There have to be consequences for the people who aided, abetted, and created this system," says Rep. Peter DeFazio (D) of Oregon, who reports that his office has been deluged this week with calls from constituents opposing the bailout.
"Anyone taking assistance from the federal government should have dramatic limits over their executive compensation," he adds. Taxpayers shouldn't be on the hook "to make these firms whole ... so they can pay their bonuses this Christmas."
Both the House and Senate banking panels have drafted legislative language on executive compensation for a bailout bill this week.
In its most recent draft, the House Financial Services Committee calls for "appropriate standards for executive compensation" as a condition for companies to sell off bad assets through the program. These include: a "clawback" provision for bonuses based on earnings, gains, or other criteria that are later proved to be inaccurate; limits on incentives based on risks deemed "inappropriate or excessive"; and limits on severance compensation to senior executives "in the public interest."
The Senate banking panel proposes simply adding a provision to require the Treasury Secretary to have executive compensation standards for entities that seek to sell assets through the program, including limits on incentives and severance and a requirement for a clawback provision.
In comments on Sunday television talk shows, Paulson said he would oppose such "punitive" add-ons, because they would discourage institutions from participating in the program. Such reforms could come later, he said. "My whole objective with the plan we have is to give us the maximum ability to make it work."
But this week, many members of Congress weren't buying the argument.
"We're being told we have to send out a $700 billion life preserver to these guys, but if we reduce executive pay they won't grab the life preserver, they'll let themselves sink," says Rep. Jerrold Nadler (D) of New York.
In a statement, the Center on Executive Compensation, a corporate think tank, warned that the congressional proposals would require the government to scrutinize the executive compensation of hundreds of firms. "This would set a precedent for federal regulation of executive compensation design generally that would undermine performance-based pay."
"I think the leadership of these companies have to be held accountable. If any CEO hesitates to participate because of his or her narrow self –interest – his or her compensation – I'd say it's time to get a new CEO," said Sen. Sherrod Brown (D) of Ohio at Tuesday's hearing.