President Obama on Wednesday placed strict limits on the pay of the top executives at big financial firms that stand to benefit from government bailouts, in what analysts said amounts to political cover for a costly new program to assist ailing banks that the administration will announce next week.
Although the move is aimed at blunting the political impact of a widening bank bailout, it also demonstrates that the government has taken such large stakes in several firms that it has effectively nationalized them and can now dictate how they are run. Democratic reformers also hope the measures will spawn a transformation of Wall Street pay practices that have encouraged risk and helped cause the financial crisis.
“This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success,” Mr. Obama said in announcing a $500,000 cap on overall bank executive compensation. “But what gets people upset - and rightfully so - are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”
Wall Street firms that gave their executives “their customary lavish bonuses” last year despite going “hat in hand” to taxpayers showed “bad taste,” he said. “It’s a bad strategy — and I will not tolerate it as president.”
The pay cap would apply to all institutions that negotiate agreements with the Treasury Department for “exceptional assistance” beyond a one-time capital infusion - a group that includes American International Group Inc., Bank of America Corp. and Citigroup Inc. The administration is expected to expand such assistance to other large banks in a program to be announced next week.
“We will have to do more - substantially more - to fix this crisis,” said Treasury Secretary Timothy Geithner.
Under rules laid down by the president, firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.
Healthier institutions would have more leeway. They also face the $500,000 limit if they’re getting government help, but the cap can be waived with a nonbinding shareholder vote.
Mr. Obama said that “we’re taking the air out of golden parachutes” by eliminating the massive severance packages for executives who leave failing firms.
Brian Gardner, banking analyst at Keefe, Bruyette and Woods, said bank executives have been expecting the crackdown on executive pay, which is needed to gain political support for further funding of bank rescues in Congress. By some estimates, the cost of the bank rescue could exceed $1 trillion.
“The administration needs to look tough on Wall Street,” but the limits are not as austere as they seem because they will apply only to a few banks that benefit from the Treasury’s program in the future, he said.
David M. Smick, chairman of Johnson Smick International Inc., said the administration’s “angry” campaign against excessive compensation is justified, but amounts to “political cover.”
“The reason for this public campaign is that next week officials are likely to hand the banks a taxpayer-funded bailout potentially worth trillions.”
The administration, he said, also is essentially offering bank executives a deal: Lower pay now in exchange for higher stock prices in the future once the banks recover with the help of Treasury.
Many Wall Street executives denounced the restrictions and said they would backfire by depriving ailing banks of the top-caliber executive talent that they need to survive.
“The new U.S. president is courting disaster,” said Edward Hadas, an analyst at Breakingviews.com. “This sort of constraint is likely to make bad companies worse.” He predicted that the most talented executives would move to banks that are not under pay restrictions.
Peter Schiff, president of Euro Pacific Capital, said big Wall Street banks that are on the brink of insolvency and need government assistance largely deserve the heavy-handed treatment.
“Now that the financial services industry has been essentially nationalized, it is proper that their employees be paid in the same range as postal workers and FBI agents,” he said. “Rather than oppose this measure, it should be carried through to completion. Deliver that final blow to these firms, and the financial industry can put these bailouts behind us.”
Beyond expanded compensation limits and golden parachute bans for the top 20 to 25 bank officers, the new rules would require bank boards of directors to vote on executive office renovations, entertainment and use of corporate jets.
Mr. Obama said he later will propose compensation restrictions even for companies that don’t receive government assistance. They would require top executives at financial institutions to hold stock for several years before they can cash out and require nonbinding shareholder votes on “say on pay” resolutions.
Graef Crystal, an executive compensation specialist, said that “watermelon-sized greed glands” on Wall Street have led most financial executives to expect bonuses in the millions of dollars each year. But their base salaries are relatively low compared with those at nonfinancial companies - averaging about $600,000 a year. Treasury’s restrictions may push Wall Street in the direction of offering higher base salaries with lower bonuses, he said.
Mr. Crystal criticized Treasury for not taking into account that some executives in the profitable divisions of failing companies may perform well and deserve big raises.
“Granted that if a company gets money from the government, it is going to have to endure some interference from the government,” he said. “But what the Treasury has done is to create a bureaucratic nightmare.”
Tad Rivelle, chief investment officer at Metropolitan West Asset Management, said it will be hard to change the entrenched culture on Wall Street that favors taking big risks to make a quick profit.
Top executives have little or no incentive to stand in the way of the latest market obsessions when the good times are rolling, whether it be subprime mortgages or crude oil futures, particularly when competitors are profiting from it.
“Capitalism is such a potent force, it makes these periods of time happen,” he told a Reuters conference. “Woe betide the individual who gets in the way.”
Christina Bellantoni contributed to this report.
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