Some executives won’t feel Obama’s salary caps

Bloomberg

Executives at Goldman Sachs Group, JPMorgan Chase and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced Wednesday by U.S. President Barack Obama.

The rules, created in response to growing public anger about the record bonuses the financial industry doled out last year, will apply only to top executives at companies that need "exceptional" assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more.

Obama, 47, "is not proposing to go back and get that $18.4 billion in bonuses back," Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta, said of the cash bonuses New York banks paid last year, the sixth-biggest haul in history.

In addition, some executives may be compensated for the potential reduced salaries with restricted stock grants, which may result in huge paydays after the bank repays the government assistance with interest.

"They’re just allowing companies to defer compensation," said Graef Crystal, a former compensation consultant and author of "The Crystal Report on Executive Compensation."

The restrictions are "a joke," he said, because "if the government is paid pack, you can be sure that the stock will have risen hugely."

Exceptional assistance
According to the new guidelines, announced Wednesday by Obama and Treasury Secretary Timothy Geithner, senior executives at banks that negotiate "exceptional assistance" deals with Treasury, such as the targeted relief provided to Citigroup last November or to Bank of America in January, would be limited to annual compensation - salary plus bonus - of $500,000.

Other perks that enraged Americans - such as a $1.2 million office redecoration by the chief executive of Merrill Lynch, which took $10 billion in government funds, or a four-day Las Vegas junket for executives at Wells Fargo, which accepted $25 billion - will be subject to new disclosure rules.

A White House official called it the name-and-shame provision, based on the idea that banks would limit such benefits if forced to disclose them.

"For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy, and I will not tolerate it as president," Obama said.

Yet none of the new rules will apply to any firm until it negotiates an extraordinary deal with the federal government to remain solvent.

"What I’m a little bit surprised by is that those pay restrictions don’t apply to what I would call the double dippers, which is basically Citigroup and Bank of America, which have come back for capital," said Charles Peabody, an analyst at Portales Partners. Both banks received money under the Treasury’s $700 billion Troubled Asset Relief Program, and required additional bailout funds and a government guarantee of their assets.

Shrugging off the rules
For some firms, the rules are insignificant. Morgan Stanley is among companies that don’t expect the restrictions to affect their business because they foresee no need for additional government help.

"We have one of the highest Tier 1 capital ratios among financial services firms, so we do not anticipate the need for additional government capital," said Mark Lake, a spokesman for Morgan Stanley in New York, when asked about the restrictions.

Goldman Sachs said Wednesday it wants to repay $10 billion it got from Treasury under the TARP to signal the firm is healthy and to escape limitations that came with that infusion of money.

JPMorgan chief executive Jamie Dimon said Feb. 3 that the firm did not need capital and didn’t ask for TARP funding. The lender accepted the $25 billion it received from the first capital injection at the request of the government and to help stabilize the banking system, he said.