SATURDAY, JULY 24, 2010
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Economy & Business
Feinberg: Banks paid too much, but they didn’t break the law Bailed-out companies
won’t have to return executive compensation
by Jia Lynn Yang
The government’s pay czar scolded 17 banks for handing out $1.6 billion in excess executive pay while benefiting from taxpay- er bailout funds at the height of the financial crisis. But he will not force banks to return any of the money. Kenneth Feinberg, who was ap- pointed as the Obama adminis- tration’s special master for com- pensation, said the offending firms gave out payments that were “ill-advised,” but that they did not act against the public in- terest or break the law. The firms that paid too much, according to the report released by Feinberg on Friday, include the country’s biggest banks: Citi- group, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley.
Citigroup, which received $45 billion in bailout help, was the worst offender, handing out $400 million in excess pay, according to a government source close to the investigation. Much of the money went to executives at Citigroup’s successful energy trading unit, Phibro.
Other large banks formed a sec- ond tier of excess pay, followed by the smallest banks of the group. Feinberg examined payouts at the 419 firms that received tax- payer assistance, focusing on ex- ecutives who were paid more
than $500,000 during a handful of months from late 2008 to early 2009. In determining excess pay, Feinberg used his judgment while examining two pieces of criteria: the amount of the payout and whether there was enough justifi- cation for the pay. “This is armchair quarterback-
ing,” said Feinberg, adding that he looked back at events from two years ago with “some reluctance” because he was second-guessing decisions made by others. Of the 17 companies that he found were egregious in their compensation, 11 have repaid the assistance received from taxpay- ers. Friday’s report recommends
that companies adopt an emer- gency provision that would allow them to break pay contracts if an- other financial crisis were to oc- cur. If the company’s board deter- mined that the firm was in a cri- sis, the compensation committee would be allowed to revisit pay levels. During the recent banking meltdown, many companies pro- tested that they were legally obli- gated to honor their payment contracts with executives. Feinberg said all 17 companies
have agreed to consider such an option. “Getting our compensation
structure right is a priority for us,” Citigroup said in a statement. “Since the crisis, we have done a lot of work to make sure it’s per- formance-based and we look for- ward to reviewing the Special Master’s recommendations.” Compensation experts, how-
ever, questioned a system where banks could lower pay for top ex- ecutives in the midst of steering
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their compensation practices at any time,” she added. “That’s not making Wall Street pay for what it did. The excessive pay was reported
at only a small group of the 419 firms examined. The report found that out of the entire pool of firms receiving taxpayer funds, 240 did not give more than $500,000 to any of the top 25 executives. A subset of 116 firms handed out this amount to five or fewer exec- utives. The pay czar has forced banks to change their compensation practices before. Last October, Feinberg ordered companies that received the largest amounts of bailout money to cut compensa- tion for their highest-paid exec- utives by about half.
Other companies singled out ALEX WONG/GETTY IMAGES
As he issued a report on executive compensation Friday, Kenneth Feinberg, the federal government’s pay czar, asked that “we all move forward with lessons learned and that we put this sad chapter behind us.”
their firms through trouble. “He’s saying, ‘If you’re in the crisis already, we can renege on the deal.’ What if you’re two steps away? Who would want to work there?” said Alan Johnson, an ex- ecutive compensation consultant who specializes in the financial services industry. “It sounds great at 10,000 feet,”
Johnson added. “But in the real world, it would be impossible.” Experts also doubted that banks would voluntarily adopt
such rules. Steven Hall, a com- pensation consultant, pointed out that Citigroup generously paid ex- ecutives at Phibro because it was a profitable unit. The company couldn’t afford to lose star per- formers, especially while other parts of the firm were struggling, he said. Citigroup eventually sold Phibro after receiving pressure from Feinberg about pay. “If you’re not going to pay those people, they’re not going to stay,” Hall said. “You’re not going to
have a viable business.” But critics pointed out that
bank executives need to be held accountable for bad performance. “One of the most common- sense and kind of the bare mini- mum things you could do would be to say, ‘If your company is tank- ing, you don’t get paid as if it was flying high,’ ” said Heather McGhee, director of the Washing- ton office of Demos, a liberal think tank. “Any company could change
by Feinberg include McLean- based Capital One, AIG, Amer- ican Express, Wells Fargo, Boston Private Financial Holdings, CIT, M&T Bank, SunTrust, Bank of New York Mellon, Regions Finan- cial, PNC Financial and U.S. Ban- corp. The report declined to name in- dividual executives whose pay was deemed excessive. Feinberg said he didn’t want his findings to trigger a round of private lawsuits and congressional hearings. “I think it’s sufficient they vol- untarily accept this [pay contract] break position, that we all move forward with lessons learned and that we put this sad chapter be- hind us and look forward,” said Feinberg, who will soon shift his attention to overseeing the $20 billion BP oil spill compensation fund.
yangjl@washpost.com With less collected in taxes in down economy, projected deficit grows deficit from A1
the debt,” Senate Minority Lead- er Mitch McConnell (R-Ky.) said in a statement. “It’s time for a new approach, one that listens to the American people rather than forcing Washington-based man- dates.”
Democrats sought to remind voters that persistently large budget gaps are primarily the re- sult of a severe recession that de- pressed tax revenue and forced policymakers to spend hundreds of billions of dollars on economic rescue programs, such as last year’s $862 billion stimulus package. Unemployment has nonethe- less risen. The White House pre- dicted Friday it will not dip be- low 8 percent until the end of 2012. Still, many economists say federal action probably saved the nation from a full-blown melt- down.
“That federal response — in- cluding actions by the Federal Reserve, efforts to stabilize the fi- nancial sector started by the Bush administration, and last year’s economic recovery pack- age — has successfully pulled the economy back from the brink,” Senate Budget Committee Chair- man Kent Conrad (D-N.D.) said in a statement. “Although the economy remains fragile and the unemployment rate is still far too high, economic and job growth have begun to return.” But they have not returned fast enough to improve the budg- et picture — or the national mood. A CNN/Opinion Research Corporation poll released Friday found that Obama’s economic approval rating has fallen to a new low, with 57 percent of those surveyed saying they disapprove of Obama’s handling of the econ- omy. In the same poll, 47 percent of respondents ranked the econ-
omy as the most important issue facing the country; the budget deficit followed at 13 percent. In its semiannual fiscal out- look, the White House budget of- fice acknowledged that “the U.S. economy still faces strong head- winds,” including tight credit markets, too many unsold houses and state governments burdened by their own budget deficits. Christina Romer, chair- man of the president’s Council of Economic Advisers, said eco- nomic turbulence in Europe has also had an impact, “ever so slightly dampening growth pros- pects in 2011.” The report said that “despite these headwinds, the adminis- tration expects economic growth and job creation to continue for the rest of 2010 and to rise in 2011 and beyond.” The updated forecast had a mixed impact on deficit projec- tions. For 2010, lower spending
than expected on unemployment benefits and bank deposit insur- ance led to a lower deficit projec- tion; the White House had previ- ously predicted a budget gap of $1.56 trillion this year. Mean- while, lower tax receipts, primar- ily from capital gains taxes, raised deficit projections for 2011 and 2012.
But the long-term forecast
stayed about the same, with the White House predicting addi- tional borrowing of $8.5 trillion through 2020, a sum that would drive the national debt to more than 77 percent of annual eco- nomic output. That would be the highest percentage since 1950. Independent forecasters, such as the Congressional Budget Of- fice, say that number will prob- ably be significantly higher if current policies remain un- changed. Obama has created a bipartisan commission to devel- op a strategy for stabilizing the
Acting comptroller of the currency named as office’s power grows by Brady Dennis
with the office, upholding its right to preempt state laws. Much of Dugan’s term was de-
Treasury Secretary Timothy F.
Geithner on Friday named a top staffer at the Office of the Comp- troller of the Currency to be act- ing director of the agency when John C. Dugan leaves office next month. John G. Walsh, chief of staff and public affairs at the office since October 2005, will inherit an agency with expanded reg- ulatory authority granted by the massive financial overhaul law signed by President Obama this week. During the next year, the regulator will absorb the Office of Thrift Supervision, begin to craft rules to implement portions of the far-reaching financial legisla- tion and work with international regulators to craft new capital standards. Walsh previously served as ex-
ecutive director of the Group of 30, a nonprofit organization that studies economic issues. He also has held positions on the Senate banking committee and was an international economist for the Treasury Department. He is a graduate of the University of No- tre Dame and holds a master’s de- gree from Harvard’s John F. Ken- nedy School of Government. Walsh succeeds Dugan, a bank-
ing lawyer who was appointed in August 2005 by President George W. Bush. Dugan’s tenure included repeated conflicts with state reg- ulators over a doctrine known as preemption. State attorneys general have said that they often spotted abu- sive and unsound banking prac- tices far sooner than federal reg- ulators and should have been able to impose tougher limits on firms. Dugan and the comptrol- ler’s office, however, asserted an exclusive right to police the activ- ities of banks with national char- ters. The courts generally sided
fined by the recent financial cri- sis. “It is hard to imagine a more
challenging period for banking than these last few years,” he said in his final speech as comptroller this week. “At the same time, we know that new crises will emerge,
debt by 2015. The White House and senior Democrats say cutting deficits too quickly would threaten the recovery. But Sen. Judd Gregg (R- N.H.), a member of the presi- dent’s budget commission, called it “worrisome” that the adminis- tration seems to be relying solely on the commission. And some in- dependent budget analysts agreed. “The White House has to use
the bully pulpit to spotlight the nation’s fiscal challenges,” said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. “The president cannot afford to sweep this type of fiscal warning under the carpet, or we risk that policymakers will go on their merry way . . . ignoring the warn- ings and marching towards fiscal calamity.”
montgomeryl@washpost.com
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