The House Committee on Financial Services announced Thursday it had passed H.R. 1664, the pay-for-performance bill that would prohibit certain compensation payments by firms that have received capital investments by the government through the Troubled Asset Relief Program. The bill would prohibit "unreasonable or excessive" compensation as well as "non-performance based bonuses." It would apply to Fannie Mae (FNM) Freddie Mac (FRE) and the Federal Home Loan Banks through its application to the Economic Recovery Act. Any financial institution subject to the new regulations would also be required to submit an annual compensation report to the Treasury Department secretary detailing the number of workers and dollar amounts of compensation for the fiscal year. “An economy in which a bank executive can line his own pocket by destroying his company with risky bets is an economy that will spiral downwards," said Alan Grayson, D-Fla. "And a government that hands out money to such executives is a government that fails to protect the taxpayers." The bill's passage in the committee -- by a 38 to 22 vote -- means it has cleared a major hurdle on the way to becoming law. It now faces full House consideration, "which could come as early as next week," the committee said. The bill came about after the $165 million in bonuses paid to employees of the financial products unit of American International Group Inc. (AIG), the very unit blamed for the insurer's downfall. CEO Edward Liddy appeared at a House committee hearing shortly after the distribution of the bonuses and called for the return of half of all bonuses in excess of $200,000. The bill would work as an alternative to the hefty tax discussed in the initial outcry against the bonuses; a tax up to 90 percent on bonuses granted within firms that have received TARP funds caused some to question what group the federal government would tax out of bonuses and compensation next. The bill's focus on pay-for-performance "takes a targeted approach to eliminate incentives that encourage executives to make risky decisions and threaten the company's viability," according to a media statement released by the bill's cosponsor, Jim Himes, D-Ct. "This is responsible legislation that will ensure accountability for taxpayers and shareholders while keeping employee pay a matter of measurable job performance rather than public opinion," Himes said. A resignation letter from an executive vice president of AIG Financial Products, obtained this week by the New York Times, paints a different picture of the controversial bonuses that sparked discussion of the bill. Jake DeSantis, in his letter to Liddy, argued the retention bonuses were promised as an incentive to remain at the company and wind down business operations. According to DeSantis' letter, many of the employees affected by the bonuses had not been responsible for the credit default swaps and other products that pulled the division down. These employees even turned down other job offers at more stable companies in order to remain at AIG and wind down businesses, DeSantis said. "I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so," the letter reads, in part. "Like [Liddy], I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down." Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.