Wall Street Pay Cuts Stoke Debate About Washington’s Reach

Bloomberg (Link) - Julianna Goldman, Ian Katz and Robert Schmidt (October 22, 2009)

 The Obama administration slammed Wall Street by ordering pay cuts of an average of 50 percent and caps on benefits for top executives at companies owing the government billions of dollars from taxpayer-funded bailouts.

The news triggered debate about the government�s reach into private industry, whether pay reductions would spread to other companies and if a talent drain from U.S. firms would ensue. Others cheered the move.

�I don�t think there will be any charity cases on Wall Street,� said Representative Barney Frank, 69, a Democrat from Massachusetts and chairman of the House Financial Services Committee in a telephone interview. �This is a very good thing.�

Executives at seven companies including New York-based Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp. will have their pay cut by an average of 50 percent after months of negotiations with Kenneth R. Feinberg, 63, the U.S. special master on compensation, according to people familiar with the matter.

The cash portion of salaries for the 25 highest-paid employees will be slashed 90 percent under Feinberg�s review, which will be released as early as today, according to one person familiar with the talks. Some cash will be replaced by shares that employees will be restricted from selling immediately, another person said.

�Slam Dunk�

The administration, mindful of popular anger over Wall Street bonuses and risk taking that sparked the worst financial crisis in seven decades, responded favorably to Feinberg�s work. �The president put Ken Feinberg in place in order to be an advocate for taxpayers and it appears that Feinberg is doing what the president put him in place to do,� said Bill Burton, a White House spokesman.

Some compensation experts said that the moves would drive talent out of U.S. financial institutions when their expertise was most needed.

�The government is acting like the owner they are, and they�re a pretty ticked-off owner,� said Steven Hall, managing director of New York-based compensation consultant Steven Hall & Partners LLC. �The fear is, will this make people throw up their hands and say, �I have to leave�?�

Politicians disagreed. �It�s about time that somebody stands up to these folks we bailed out,� Representative Elijah Cummings, a Maryland Democrat, said in a phone interview. �They seem to have forgotten that they would not have jobs in many instances if it were not for taxpayers.�

�Main Street�

Main Street hasn�t forgotten, noted Charlie Cook, publisher of the nonpartisan Cook Political Report in Washington.

According to a recent poll conducted by Hart Research for the Economic Policy Institute, 54 percent of Americans said that �Wall Street investment companies� have benefited the most from the government�s stimulus efforts. Only 10 percent said their family has felt significant benefits.

�It would be a mistake for the financial sector to underestimate the depth and breadth of this anger,� Cook said.

�Politically it�s a slam dunk for the administration,� said Dan Schnur, who was communications director of Republican Senator John McCain�s 2000 presidential campaign. �As the administration takes on the CEOs of these companies this forcefully, even if it�s a relatively limited number of companies, the voters are going to react very positively.�

Other Republicans said the administration shouldn�t have bailed out banks in the first place. [emphasis mine]

�I hope taxpayers realize that the only way they ever end up subsidizing offensive executive salaries is when the government bails out the executives and the companies they run in the first place,� Representative Jeb Hensarling, 52, a Texas Republican and member of the TARP Congressional Oversight Panel, said in a statement.

�Political Pressure�

Feinberg, who was special master of the September 11th Victim Compensation Fund, was named to the Obama administration pay position in June following public outrage over reports in March that New York-based American International Group paid $165 million in bonuses to employees of the derivatives unit.

While some consultants who advise companies on pay issues said Feinberg was being too aggressive, political analysts and lawmakers said the administration�s efforts to curb pay are appropriate.

�I suspect that the government is responding to building political pressure because Wall Street has found its stride again,� said Jeff Davis, an analyst at FTN Equity Capital Markets. �Pay is going to be huge at previously TARPed institutions such as Goldman Sachs, Morgan Stanley, and JPMorgan.�

�They�re responding to a building political firestorm in Congress,� Davis said. �As much as the Street wrings its hands about the government setting things like pay, once you take the government�s money, you got into that bed.�

�Poaching Attempts�

To be sure, the administration�s role in corporate governance could jeopardize the government�s own investments in these companies. Some analysts warned that top performers at firms like Citigroup, in which the U.S. has a 34 percent stake, could jump to competitors that don�t operate under the same restrictions.

With steep pay reductions, �we will be cutting off the taxpayer�s noses to spite their faces,� said Robert Profusek, a partner at Jones Day in New York. �This slash-and-burn approach is, in my view, incredibly short-sighted.�

�Strong Position�

�They have taken a very strong position,� said Gerald Rosenfeld, deputy chairman of Rothschild Inc. and co-director of New York University�s Business and Law program. �There are going to be a lot of active poaching attempts, most likely by European banks. This certainly is going to be a problem for Citigroup and Bank of America.�

Stephen Cohen, Citigroup spokesman, declined to comment, as did Scott Silvestri, a spokesman for Bank of America. Citigroup shares closed unchanged at $4.42 in New York Stock Exchange trading. Bank of America closed down 2.9 percent at $16.51.

In addition to compensation at Citigroup, Bank of America and AIG, Feinberg is overseeing pay at Auburn Hills, Michigan- based Chrysler Group LLC, Chrysler Financial Corp., Detroit- based General Motors Co. and GMAC Inc.

The automakers might escape the same level of cuts, according to David Cole, chairman for the Center for Automotive Research, who noted that the auto executives are paid less than those of banks.

Feinberg�s review went beyond paychecks. Benefits such as limousine service and use of a company�s aircraft valued at more than $25,000 must be approved by him, the people said. Some companies, including AIG, have already exceeded that limit and will have to pay back the difference to the U.S. Treasury, according to one person familiar with the negotiations.

AIG

Employees of AIG�s derivatives unit, blamed for insurer�s near-collapse last year, will be limited to $200,000 in total pay, one person said. Feinberg�s report also will urge AIG executives who have pledged to return their bonuses to honor that commitment, one person familiar with the matter said yesterday.

In the last few weeks, Feinberg has sent signals that he was willing rein in Wall Street practices under his jurisdiction.

Citigroup on Oct. 9 agreed to sell its Phibro LLC energy- trading unit to avoid a potential showdown with Feinberg over a $100 million pay package for Andrew Hall, the unit�s CEO. Bank of America Chief Executive Officer Kenneth Lewis, at Feinberg�s urging, agreed last week to give up his 2009 salary and bonus.

�If Wall Street doesn�t like it, they can give the money back,� said Democratic strategist Steve McMahon. �If they see a passing ship with better financial prospects, I�m sure they�ll jump anyway whether there�s government money involved or not.�