“There’s deeply rooted anger on the part of the average American,” Frank said at a Washington news conference Tuesday, February 3.
He said the compensation restrictions would apply to all financial institutions and might be extended to include all U.S. companies.
The provision will be part of a broader package that would likely give the Federal Reserve the authority to monitor systemic risk in the economy and to shut down financial institutions that face too much exposure, Frank said.
Also included in this proposal will be registration requirements for hedge funds aimed at making their finances more transparent and limits on conflicts of interest at credit-rating agencies such as Standard & Poor’s, he said.
The bill, which the committee is working on in consultation with the Obama administration, also will require financial institutions that bundle mortgages into securities to share in potential losses. This would give firms an incentive not to make bad loans, Frank said. Institutions that securitize loans improperly will incur tougher penalties.
“There have been too few constraints on major financial institutions incurring far more liability than they could handle,” Frank said.
The committee hopes to have a general outline of the legislation by early April, he said. It will be the panel’s first priority in its effort to restructure financial regulation in the wake of the worst economic crisis since the Great Depression.
Frank has summoned the CEOs of Citigroup, JPMorgan Chase and the seven other U.S. financial firms that received $125 billion from the Troubled Assets Relief Program (TARP) to testify at a February 11 committee hearing.
Frank seems to be in synch with the Obama administration in his plans for executive compensation.
Treasury Secretary Timothy Geithner said last month that he might try to extend to all U.S. companies a restriction that prohibits bailout banks from taking a tax deduction of more than $500,000 in pay for each executive.
The TARP legislation enacted in October seeks to give companies receiving aid under the $700 billion bailout a number of incentives to curb what it calls excessive executive pay.
Geithner said he would consider “extending at least some of the TARP provisions and features of the $500,000 cap to U.S. companies generally.”
Under the legislation, banks receiving bailout money must limit golden parachute payments to senior executives to no more than three times the executives’ base pay. The companies also must subject any bonuses or incentives to clawbacks if the payouts are based on a bank’s misleading financial statements.
In addition, bailout recipients can’t offer top managers incentives that “encourage unnecessary excessive risks that threaten the value of the financial institution.”
These limits apply to the CEO, CFO and the next three most highly compensated executives in a bank receiving rescue funds.
Frank said provisions on golden parachute payments and bonus clawbacks would probably be in the legislation, though he declined to provide more detail because “we’re early in the process.”
A congressional oversight panel headed by Harvard law professor Elizabeth Warren also recommended last week that the Treasury consider revoking executive bonuses at failed institutions getting federal aid.
Currently, these institutions must subject bonuses to clawbacks only if the payouts are based on banks’ misleading financial statements.
Rep. Spencer Bachus of Alabama, the top Republican on the committee, said last month that he had reservations about giving the Fed new powers, such as the authority to monitor systemic risk.
Frank said that after lawmakers address issues on systemic risk, they will consider how to bolster investor protection via changes at the Securities and Exchange Commission. The committee also will review proposals to assist struggling homeowners and expand the housing supply, and to strengthen international financial institutions such as the World Bank, he said.