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Obama Limits Executive Pay for Firms Tied to Bailout

February 4, 2009 at 6:00 PM EDT
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President Obama announced Monday new caps on executive pay for those firms receiving federal bailout aid. Analysts examine the new guidelines.
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JIM LEHRER: President Obama today ordered caps on executive pay under the financial rescue program, and he said that’s only the first step. Judy Woodruff has our lead story report.

JUDY WOODRUFF: The president sent a clear message to companies receiving help under TARP, the Troubled Asset Relief Program. He said, if they want the government’s help, they’re going to have to play by the government’s rules.

U.S. PRESIDENT BARACK OBAMA: We all need to take responsibility, and this includes executives at major financial firms who’ve turned to the American people hat in hand when they were in trouble, even as they paid themselves customary lavish bonuses.

JUDY WOODRUFF: Mr. Obama laid out the plan at the White House, joined by Treasury Secretary Tim Geithner. The new rules impose a cap of $500,000 a year on the salaries of senior executives.

Banks and other institutions that want to exceed the pay limit would have to use stock that cannot be sold until the government is repaid its money.

The limits apply to companies who make future requests for what is called “exceptional assistance” from the Treasury. But the plan is not retroactive. Firms that already received funds — including Citigroup, Bank of America, and AIG — would be exempt, unless they ask for more money.

The president had insisted on Tuesday that he’s not proposing a government takeover of the private sector, and he underscored that point today.

U.S. PRESIDENT BARACK OBAMA: This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success, and we certainly believe that success should be rewarded.

But what gets people upset — and rightfully so — are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers, many of whom are having a tough time themselves.

For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis isn’t just bad taste, it’s bad strategy, and I will not tolerate it as president.

JUDY WOODRUFF: Mr. Obama also included benefits and severance packages under his plan. He said it’s a matter of fairness and common sense.

U.S. PRESIDENT BARACK OBAMA: Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified.

And we’re putting a stop to these kinds of massive severance packages we’ve all read about with disgust; we’re taking the air out of golden parachutes.

JUDY WOODRUFF: The announcement coincided with developments at two major banks that got Treasury aid. Wells Fargo canceled a series of employee retreats at Las Vegas casinos, and Bank of America said it will sell some of its corporate planes.

In Congress, the president’s statement won support on both sides of the aisle. Democrat Dan Maffei of New York.

REP. DANIEL MAFFEI, D-N.Y.: I think that’s totally justified and, in fact, sort of the least we can do. I’ll tell you, my constituents in upstate New York, they clearly think that, if there’s going to be this money from the federal government, then there has to be some sacrifice shared by the people who run these companies.

JUDY WOODRUFF: Republican Jeb Hensarling of Texas.

REP. JEB HENSARLING, R-Texas: I don’t want government to get in the business of setting compensation levels for anybody in our society. But, again, when taxpayer funds are involved, it is a completely different set of rules.

These companies have come to the American taxpayer and said, “Give us help.” I mean, for a schoolteacher in Mesquite, Texas, a small-business person in Athens, Texas, that I represent, to say that all of a sudden they have to sacrifice so that some Wall Street CEO who made $20 million bonus last year can get bailed out, that’s simply unacceptable.

JUDY WOODRUFF: On Wall Street, few executives spoke against the plan publicly, and they’ll have more to digest next week. That’s when the Treasury lays out a new framework for spending the second half of the TARP funds, some $350 billion.

Proposed limits are appropriate

Nell Minow
The Corporate Library
[Wall Street] allowed the subprime mess to get completely out of hand, and they don't seem to have any kind of a sense for how they're coming across or any sense of responsibility for it.

JUDY WOODRUFF: For some analysis of the president's new rules and what their effect might be, we get two views. Nell Minow is with us again from the Corporate Library, a watchdog group on corporate governance. She is the co-founder. And Steve Bartlett, he is president and CEO of the Financial Services Roundtable. It's a trade association representing 100 of the country's largest banking, insurance and securities companies.

Thank you both for being here.

Steve Bartlett, to you first. Is there a problem as the president described it? Is it as bad as he said it is?

STEVE BARTLETT, CEO, Financial Services Roundtable: Well, I think the rhetoric is a little overheated, but it's kind of on all sides, and I totally get that, and I understand it, because we're in the middle of a crisis.

But I have to say that these -- there are 250 companies that have gotten the TARP capital. They were asked to take this TARP capital. They used the TARP capital to increase their balance sheet and make more loans and increase their lending. That's good for the economy; that's what we want them to do.

The president's program itself of what he proposed is pretty measured, it's reasonable, and it does some good things. So the rhetoric is a little overheated on all sides -- I understand that -- but the proposal is actually pretty good.

JUDY WOODRUFF: Nell Minow, rhetoric overheated here?

NELL MINOW, The Corporate Library: I think it's very justified. Everyone in America has got a right to be quite angry with Wall Street. They allowed the subprime mess to get completely out of hand, and they don't seem to have any kind of a sense for how they're coming across or any sense of responsibility for it.

I think my biggest regret is that they didn't step up to the plate and make these kinds of changes themselves. I would much rather have seen it come from them. My second choice is that the president stepped in, and I think that his approach is the right one.

JUDY WOODRUFF: So, Steve Bartlett, you're saying a measured response. So you like everything about what they're suggesting?

STEVE BARTLETT: I think it works. I think it works fine. I think it's the right response. It's appropriate. It applies to companies that will be receiving new infusions of capital, so that they know what they're getting into, and then it also applies to those companies that are called the excessive or the exceptional assistance, that where the money was so much more than the norm that these rules apply to them.

So I think that's the right application. Nobody is exempt. Everybody gets applied to. And I think it's the right approach.

JUDY WOODRUFF: But what about...

STEVE BARTLETT: I also like restricted stock, which we were talking about. I think that's a major step forward.

President needed to intervene

Steve Bartlett
CEO, Financial Services Roundtable
[T]he system is actually working. You can point to examples and say, well, it didn't work in that case, that guy got paid too much. But, by and large, the companies have reduced their pay.

JUDY WOODRUFF: Well, let's talk about that in a minute. But what about Nell Minow's point that this is something the companies should have done on their own?

STEVE BARTLETT: The companies have done it. I mean, it's sort of easy to paint with a broad brush. There are some 250 companies. Executive pay has been cut.

Bonuses on Wall Street, which is sort of everybody's favorite whipping boy, bonuses were cut in half last year for good reason. Earnings were cut in half, and bonuses are tied to earnings.

So the system is actually working. You can point to examples and say, well, it didn't work in that case, that guy got paid too much. But, by and large, the companies have reduced their pay and have reduced their...

JUDY WOODRUFF: If that was the case, Nell Minow, was there a need for the government, for the president to step in here?

NELL MINOW: There certainly was. And I agree with Steve that the best part of this plan is the restricted stock, because it does what I hoped...

JUDY WOODRUFF: Explain how that works and what that means.

NELL MINOW: Well, restricted stock means that you can't sell it, so there's no manipulation going on. But the most important part of it is that these stock grants that are going to be given to executives will not...

JUDY WOODRUFF: This is over and above their salary?

NELL MINOW: Over and above their salary. This is the new -- the way that bonuses will now be paid. It will be in the form of stock, and the stock won't really be theirs until the government has already been paid back. So that should keep their eye on the ball.

I think that's a great approach. And I think that that's something that we could expand beyond the bailout companies, to make sure that executives have their eye on sustainable growth, rather than whatever today's numbers happen to be.

JUDY WOODRUFF: Is it enough, Nell Minow, staying with you, that this is not going to be addressing companies that have already received TARP money or, as the president said today, exceptional assistance from the government? And, by the way, do we understand what that means?

NELL MINOW: It's going to take a little while, and we want it see what the Treasury Department has to say about it to understand the fine points.

But I think, as a legal matter, they would be tied up in court so badly if they tried to get retroactive -- I think you're familiar with the story about the barn door being locked -- that it would be a distraction. So I think that they are right in saying, going forward, this is how we're going to proceed.

Will healthy companies be harmed?

Nell Minow
The Corporate Library
There's a cap on cash compensation....[But] the sky is the limit with regard to the equity compensation.

JUDY WOODRUFF: How much -- go ahead -- how much of a hardship is this going to work?

STEVE BARTLETT: Oh, this is not a hardship. This is a good, reasonable, measured response that deals with both the political problems, some of the actual problems, and moves us forward.

You remember the goal of TARP assistance is to increase lending and increase service to the customers in the community. As a matter of fact, that's what's happening. You wouldn't know it from reading the headlines, but we just did a survey of 15 of our companies that have increased their lending in the fourth quarter, even though they only got the TARP capital late in the fourth quarter, in December.

Whitney Financial in New Orleans increased their lending by $1 billion in one quarter. So that's what's actually happening out there, but it's not necessarily making the headlines.

JUDY WOODRUFF: But is it your point, then, that what the White House did today was unnecessary?

STEVE BARTLETT: I think what the White House did was necessary to sort of calm the anger, if you will, and to put something going forward. So I think it was useful; I think it was useful.

JUDY WOODRUFF: Nell Minow, if -- one of the arguments that's been made by some critics is that this is going to lead healthy companies to decline aid from the government while only those unhealthy, so-called undercapitalized financial firms will be the ones asking for help.

NELL MINOW: That's what markets are all about. If they're healthy and they don't need it, if they do their cost-benefit analysis and say it's not worth it for them to take the aid under these circumstances, then good for them. They shouldn't be taking the aid. The ones that need it are the ones that should get the priority.

STEVE BARTLETT: Let me say, there's our first point of -- maybe only point of disagreement. I think that's the downside to this.

The public should want healthy companies to take this capital so they can make more loans. If you put additional capital into unhealthy companies, you don't get that much more lending. So it's the healthy companies.

This isn't aid. It's called assistance, but, in fact, it's capital so that they'll convert it into loans. So what you want is for the healthy institutions to take this capital so they can make more loans. That's good for the public.

NELL MINOW: Yes, but you have to keep in mind that, even though we've been calling it a cap, it's not a cap. There's a cap on cash compensation. You still have -- the sky is the limit with regard to the equity compensation.

So if you did have a healthy company, there would be no reason not to take the money, because you could still be very, very well rewarded with this restricted stock grant.

'It had to be done'

Steve Bartlett
CEO, Financial Services Roundtable
[C]ompanies are watching their compensation packages. You know, they're right in the magnifying glass.

JUDY WOODRUFF: Steve Bartlett...

STEVE BARTLETT: Fair point. Valid point.

JUDY WOODRUFF: ... what about the overall signal this sends to companies that -- will companies now watch those compensation packages more closely as a result of this?

STEVE BARTLETT: I would say that there's a little bit -- companies are watching their compensation packages. You know, they're right in the magnifying glass, in the caldron, and so that is happening without regard to this.

I think the signal is actually the reverse. I think there is -- one could say that there's a little bit of a slippery slope here, haven't fallen down the slope, but at some point you say, "Wait a minute, where does a government intervention to tell companies how to spend their money and how to -- and what expenditures are valid expenditures, where does that start and where does it does it stop?"

I think this might start down the slope. I don't think we'll go very far, but it's a bad slope.

NELL MINOW: I don't think so at all, because it's really important to keep in mind that the government is not acting here as a regulator or an enforcer. The government is acting here as a capitalist. The government provided the capital, and they are making the exact same demands on these companies that anybody who is bailing them out would make. You're always going to ask for givebacks. It was a mistake not to do that the first time. At last we're doing it right.

JUDY WOODRUFF: You know, what about his argument that this could lead to the government putting its hand further into how companies are run?

NELL MINOW: I really like the second part of the statement today, which talks about what we're going to do in the future, and it talks about convening a commission to look into this. It talks about perhaps adopting the "say on pay" proposal that's been very, very successful abroad, which would give shareholders an advisory vote on some of these compensation plans.

It's a very measured, very slow approach, and I don't think that there is anybody suggesting that we will be imposing caps on anybody that is not taking capital from the government.

JUDY WOODRUFF: And just quickly, you're still worried?

STEVE BARTLETT: Let's hope not. Let's hope not. It's a signal. It's a little bit of a signal in the right direction, but, in fairness to the president, it had to be done.

JUDY WOODRUFF: All right, well, we're going to leave it there. Steve Bartlett, we thank you. And Nell Minow, appreciate you both joining us.