JEFFREY BROWN: The Treasury Department’s so-called pay czar today rebuked 17 Wall Street banks for paying what he called ill-advised bonuses during the financial crisis. In his report, Ken Feinberg said the firms paid top executives $1.6 billion in late 2008 after the companies had received government bailout money, but before Congress imposed curbs on their pay practices in early 2009. Feinberg told the “Nightly Business Report” the banks were wrong to do so.
KENNETH FEINBERG, independent administrator, Gulf Spill Independent Claims Fund: They were too big. Some individuals were getting in excess of $10 million in bonus payments over a five-year period. There were severance payments where individuals — companies after they received TARP were paying people walking out the door, no longer working at the company.
JEFFREY BROWN: But Ken Feinberg’s report also made clear that the banks had not violated any laws and that he could not recoup the money. Joining me now is Deborah Solomon of The Wall Street Journal. Deborah, some background first. Remind us. This was a brief window of time. What was Feinberg’s assignment?
DEBORAH SOLOMON, The Wall Street Journal: Well, basically, he was asked to go back and look at this window during which banks were taking TARP money, government bailout money, but before they had passed some tough executive compensation rules. So they basically weren’t playing by any rules, but were getting government funds. And he was asked to go back and look and see whether these banks and financial firms had made any payments that were inconsistent with the public interest.
JEFFREY BROWN: And we were some very large players. We have a graphic to show our audience, but it includes the likes of Bank of America, Citigroup, J.P. Morgan Chase, Goldman Sachs, big guys.
DEBORAH SOLOMON: Yes, these were the biggest firms. You will remember, back in October of 2008, when TARP was first passed, Goldman Sachs, Citi, B-of-A, they all took money from the government. Some of them needed it. Some of them didn’t. But these were the biggest firms, and they were making big payments.
JEFFREY BROWN: Now, Ken Feinberg reports that they took — the payments were unwarranted and ill-advised, but he says he can’t get the money or he won’t go after it. What strictures is he working under? Why not go after the money?
DEBORAH SOLOMON: Well, he has very limited authority. Congress gave him the power to go back and look and then to seek to renegotiate payments that he found that were inconsistent with the public interest. He didn’t designate any of these as being inconsistent, in part because there were no rules applying at that time. So, the banks were making huge payouts, but they really were allowed to. Secondly, a lot of these firms, most of the big ones, Goldman, J.P. Morgan, Morgan Stanley, they have all paid back their TARP funds. So he has little leverage to basically say to them, give us the money back, because they will say back to him, well, we already did.
JEFFREY BROWN: Well, in fact, a lot of these banks that did pay back their TARP money, they made clear that some of them — some of them made pretty clear that they were doing it to avoid these executive pay strictures, right?
DEBORAH SOLOMON: Oh, exactly. I mean, they made no bones about it. As soon as these pay provisions were passed in February of 2009, the banks immediately contacted Treasury and said, we want out. I mean, some of the banks couldn’t get out. B-of-A and Citi had bigger problems and needed to stay in a little longer. But Goldman, J.P. Morgan, they were the first ones out the door because they felt they couldn’t live under these strictures.
JEFFREY BROWN: Now, Ken Feinberg, notably, didn’t name any particular names, although he did Citi, Citigroup, as particularly egregious. What do you know about that?
DEBORAH SOLOMON: Well, Citigroup had this gigantic contract with one of its energy traders for its unit called Phibro, a man named Andrew Hall, who made about $100 million. He was contractually obligated to be paid that money. And it was a big fight between Ken Feinberg and Citigroup earlier this year — or last year, basically — when he was trying to get that money back. And Citi wound up selling this unit to sort of get rid of it. But, in 2008, which is the period he was looking at, they made that payment, and, you know, he found it to be unwarranted.
JEFFREY BROWN: Now, Ken Feinberg did provide sort of a proposal for the future, looking maybe toward the next time, next crisis. Explain what he wants to happen.
DEBORAH SOLOMON: Well, one of the problems that he ran into was that a lot of companies had contractual agreements with people to pay them big bonuses, big severance agreements. And he didn’t feel legally that he could rip up these contracts because they were entered into in good faith, and didn’t feel like he could really just void them. But he wants is for boards of companies to have the power, during a crisis, which is not really well-defined, but during times of stress, to be able to either renegotiate, reduce, or just completely cancel contracts with people that guarantee sums for bonuses and other, you know, stock option agreements.
JEFFREY BROWN: But that would be up to companies and shareholders, presumably, a voluntary plan?
DEBORAH SOLOMON: Yes, it’s completely voluntary. And a lot of the financial services folks I talked to today said there was no way in the world they were ever going to adopt this. But it would be something that the companies would do on their own, and their boards would basically set the parameters.
JEFFREY BROWN: And they already told you no way, so they would fight that one?
DEBORAH SOLOMON: Well, I mean, they just don’t feel like they’re legally able to do this, but also they feel like it’s going to hamstring them and that people are not going to come work at a bank or a financial firm if they know that, if the firm goes through rough times, their guaranteed payment is no longer going to be guaranteed.
JEFFREY BROWN: Now, in the meantime, bring us up to date. Two years later, what’s happening with executive pay on Wall Street?
DEBORAH SOLOMON: Well, I mean, the banks are back to profitability. They’re doing really well. So, they’re paying their people handsomely. There is some change in that a lot of banks have voluntarily started to link pay to performance. In other words, instead of rewarding them for short-term gains, they’re rewarding them if the company prospers in the long term, by giving them stock options and other things that vest over long periods of time. The Fed has also come out with rules that are going to govern pay. They’re not setting pay levels, but they’re making it tougher on banks, you know, setting tougher rules for banks. So, there is sort of this moment here where the rules have toughened a little bit, but there’s nothing preventing basically the banks from making big payments. Nobody is capping what they can pay their employees.
JEFFREY BROWN: All right, Deborah Solomon of The Wall Street Journal, thanks very much.
DEBORAH SOLOMON: Thank you.