Executive Pay Limit a Sham
The much-touted CEO pay limits are a joke, Amit Paley reports in a page 1 story for WaPo.
Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules. But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.
Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.
The modification reflects how the rapidly shifting nature of the crisis and the government’s response to it have led to unexpected results that are just now beginning to be understood.
Congressional leaders from both parties thought Paulson wanted the distinction for extraordinary cases like American International Group, which the government seized in September. He wanted to be able to push executives out of companies that the government controlled and have the flexibility to bring in strong new executives, said one senior congressional aide. “The argument that they were making at the time is that the direct investment was going to be used only in circumstances where the company was AIGed, so to speak,” said a senior Democratic congressional aide.
The problem here is twofold. First, the government is in a frenzy to DO SOMETHING NOW despite not having the foggiest idea what’s going on. Congress allocated hundreds of billions of dollars for one crisis and, by the time the bill was signed, we decided that we’re in an entirely different crisis that called for a very different solution. Second, while it makes perfect sense to make sure that incompetent executives aren’t being paid off with taxpayer bailout money, the fact of the matter is that most of these people have contracts — which Congress is constitutionally precluded from modifying — and money is fungible. Further, Paulson is right: You’re not going to attract first rate CEOs to come in and fix a failing business at junior executive pay.