TARP banks pushed Treasury over executive pay and won

Executives at the largest financial institutions pressured the Treasury Department in 2009 to allow higher executive pay and threatened to hold off paying back bail outs if the demands weren’t met.

According to the Special Inspector General for the Troubled Asset Relief Program, Treasury officials told Kenneth Feinberg, then special master for TARP compensation, that the overriding goals was to get these firms to pay back the funds, even if that meant clearing salaries higher than the $500,000 cap set by the administration.

Kurt Hyde, the SIGTARP deputy for audits and evaluation, told a Senate Banking Committee this week that Feinberg was pressured to let the companies pay executives enough to keep them from quitting. Treasury officials pressured Feinberg to let the banks pay the higher salaries in order to stay competitive and repay TARP funds.

Between 2009 and 2011, Feinberg cleared salaries worth $5 million or more to 49 executives at the seven firms: American International Group (AIG), Bank of America (BAC), Citigroup (C), Chrysler Financial Services, Chrysler Holding, General Motors (GM) and Ally Financial (GJM), according to a SIGTARP audit released in January.

‘Cash poor’

Some CEOs limited pay themselves. But Hyde pointed out Ally CEO Michael Carpenter was one of the executives pushing against the $500,000 cap despite the struggles of other Americans. In January, the unemployment rate still stood at 8.3% with more than 12.3 million people out of work.

“We had an individual who was making $1.5 million total compensation with $1 million in cash,” Carpenter told SIGTARP. “Cutting this person’s salary to $500,000 cash resulted in the person being cash poor. This individual is in their early 40s, with two kids in private school, who is now considered cash poor. We were concerned that these people would not meet their monthly expenses due to the reduction in cash.”

An Ally spokeswoman said in an email the quote did not reflect the full context of the conversation, which centered around the balance of retaining executives and paying back the taxpayer.

Feinberg cleared salaries for 23 Ally executives totaling nearly $80 million in 2009. Most of it was stock and long-term restricted stock, but nearly $10 million was in cash. Carpenter received $9.5 million in compensation with $950,000 in cash.

In 2009, Hyde said, AIG wanted cash salary raises between 20% and 129% for one group of employees and 84% to 550% for another group.

“AIG proposed high cash salaries, even though some of these employees would also be paid significant retention payments,” Hyde said in his testimony this week. “Feinberg told SIGTARP that AIG was against stock salary and wanted to pay employees in cash. Feinberg told SIGTARP that in his 2009 discussions with AIG, AIG believed that its common stock was essentially worthless.”

According to Hyde, Treasury officials told Feinberg that the salaries were small compared to the massive bailout AIG received.

“Feinberg told SIGTARP that he was pressured by other senior Treasury officials and was told to be careful, that AIG owed a fortune, and that Treasury did not want it to go belly up,” Hyde told the senators. “Treasury told him that paying salaries and grandfathered awards in stock rather than cash would jeopardize AIG.”

Ally, which took roughly $17.2 billion in bailouts, and AIG, which took nearly $70 billion, are the only financial institutions subject to the executive pay restrictions that still owe the government TARP money.

Treasury holds a 74% stake in Ally, and owns a 77% of AIG, or roughly 1.4 billion shares worth $25 billion.

Regulator response

One month before the Dodd-Frank Act was signed, federal regulators issued guidance to ensure executive compensation at the 25 systemically important financial institutions are tied to risks as well as rewards.

“The amounts of incentive pay flowing to employees should reflect the risks and potential losses — as well as gains — associated with their activities,” said Federal Reserve Gov. Daniel Tarullo in November 2009. “Employees are less likely to take imprudent risks if their incentive payments are reduced or eliminated for activities that end up imposing significant losses on the firm.”

Dodd-Frank itself prohibits incentive-based payment arrangements if regulators determine it encourages inappropriate risks.

In October, the Federal Reserve reported that the 25 large banking organizations made significant progress in changing their pay structures but admited “every firm needs to do more.”

“While no silver bullet exists to align executive pay to company performance perfectly, significant efforts are being made,” said Michael Melbinger, who chairs the executive compensation group at the law firm Winston & Strawn and a representive for the banking trade group The Financial Services Roundtable.

Melbinger testified that in times of economic volatility, changes could heighten risks in compensation plans rather than mitigate them, but he added many institutions have established risk committees to monitor the packages.

Columbia Law School Professor Robert Jackson told the Senate committee that they shouldn’t expect these new rules to change bonus practices at the largest banks. The rule, he said, constricts lending to top executives but not to those who caused the systemic damage in 2007.

“Rules governing bankers’ bonuses should not be limited to the group of executives, and regulation of executives’ incentives should go beyond longstanding industry pay practices,” Jackson said.

The top five executives at Bear Stearns received roughly $1.4 billion in bonuses between 2000 and 2008. Executives at Lehman Brothers received about $1 billion over the same time, according to Lucian Bebchuk, economics and finance director at Harvard Law School.

“The concern is not that the top executives expected their aggressive risk-taking to lead to certain failure for their firms, but that the executives’ pay arrangements — in particular, their ability to claim large amounts of compensation based on short-term results — induced them to accept excessive levels of risk,” Bebchuk said.

In 2011, executive pay remained elevated at Ally and AIG.

The Treasury approved compensation packages for 25 Ally executives of nearly $90 million. At AIG, the top 23 employees received more than $110 million in total salary, according to SIGTARP.

Feinberg’s replacement, Patricia’s Geoghegan sent a letter to SIGTARP saying her office balanced principles “to construct compensation packages that not only limited executive pay and discouraged excessive risk-taking, but also enabled companies to recruit and retain executives so the seven companies could remain competitive and repay the taxpayer.”

Sen. Sherrod Brown, D-Ohio, who chairs the Senate subcommittee, said legislation should ensure banks have the resources to cover their losses and prevent future bailouts.

“Protecting U.S. taxpayers means putting an end to risky compensation packages that allow Wall Street to reap all the rewards when times are good, but stick taxpayers with the bill when things go bad,” Brown said.

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