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Treasury Should Consider Revoking Executive Bonuses at Failed Banks, Watchdog Says

February 2, 2009
Related Topics: Financial Impact, Compensation Design and Communication, Policies and Procedures, Latest News
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The Treasury Department should consider revoking executive bonuses at failed institutions that are getting government assistance, a panel appointed by Congress to oversee the $700 billion bailout recommended Thursday, January 29.

Currently, these institutions must subject bonuses to so-called clawbacks only if the payouts are based on banks’ misleading financial statements. The legislation enacted in October modeled this provision on the 2002 Sarbanes-Oxley Act.

“The prospect of losing bonus compensation could deter risky practices that make the federal rescue more probable,” said the congressional oversight panel, led by Harvard law professor Elizabeth Warren, in its report released Thursday.

Treasury should also monitor banks in the bailout to make sure that executives don’t get stock options or other incentives that encourage them to take unnecessary risks and inoculate them to stock declines, the panel said.

Treasury spokespeople did not immediately respond to a request for comment.

Among the institutions that have received federal aid under the Troubled Assets Relief Program are Citigroup, Fannie Mae, General Motors and American International Group.

In separate recommendations, the panel also said a single regulator such as the Federal Reserve should be empowered to protect consumers from risky practices on mortgages and other loans. It also called for a regulator to monitor systemic risk at financial institutions.

The report was approved by the three members appointed by Democratic lawmakers and rejected by the two Republicans. The Republicans’ dissent did not address the recommendations for Treasury on executive pay.

The 108-page report faulted mortgage giants Fannie Mae and Freddie Mac for moving in the 1990s from an executive pay model based on corporate stability to one focused on stock incentives.

“If it is not abandoned, taxpayers will end up paying for imprudent risk taking by improperly incentivized executives,” the panel said.

The report also noted that the ratio of executive compensation at public companies to average worker pay had soared nearly tenfold to 400-to-1 from 1982 to 2002.

It cited as an example Angelo Mozilo, former chief executive of Countrywide Financial Corp., who got more than $400 million from 2001 to 2007, most of it stock-related. Countrywide, the biggest provider of subprime loans, was rescued from bankruptcy by being acquired by Bank of America, which itself is now getting federal aid.

Under the bailout legislation enacted in October, banks getting bailout money must limit golden parachute payments to senior executives to no more than three times an executive’s base pay.

Bailout recipients can’t offer top managers incentives that “encourage unnecessary and excessive risks that threaten the value of the financial institution,” according to the law.

The legislation also prohibits bailout banks from taking a tax deduction of more than $500,000 in pay for each executive.

Filed by Neil Roland, a staff writer for the Crain Financial Group, which includes Workforce Management. To comment, e-mail editors@workforce.com.

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