So Much for Bailout Limits on Executive Compensation

We have some good news and some bad news to report on the government's bailout and housing efforts.

First the bad news.  The Washington Post reported yesterday that the Treasury Department made an eleventh hour change to the bailout bill that could severely limit the government's ability to punish banks for spending taxpayer dollars on executive compensation. 

The revision stipulates that the penalty for executive compensation will only apply to those banks that sold their troubled assets to the government.  Although the government might have originally intended to purchase troubled assets, Treasury quickly changed its approach, deciding instead to inject capital directly into the failing banks.  In fact, with $335 billion in bailout funds already out the door, not a penny has been spent on purchasing troubled assets, which means that the executive compensation provision is virtually worthless.

Although a Treasury spokeswoman maintains that the government still has "all the remedies available to us for a breach of contract," a former SEC general counsel points out that the government might not have the legal standing to impose penalties without fair warning.  Also, according to the Post, Treasury misled Congress about its plans to inject capital directly into the banks:

[Treasury Secretary Henry] Paulson repeatedly told lawmakers that he did not plan to use bailout funds to inject capital directly into financial institutions.  Privately, however, his staff was developing plans to do just that, Paulson acknowledged in an interview.

In October, Treasury issued new regulations on executive compensation and other issues, but provided no guidance as to how these restrictions would be enforced.  In a report released earlier this month on the Troubled Asset Relief Program (TARP), the GAO observed that Treasury officials can't even agree on their own responsibilities to oversee executive compensation, with one regulator noting that Treasury would "rely on the [financial] institution's board of directors to assess compliance."

This is not the first time Treasury has made a secretive, last minute regulatory change with far-reaching consequences.  In fact, it's only further evidence that Treasury is implementing the bailout with almost no transparency or justification, as POGO argued in a letter sent to bailout policymakers last month.

Now for the good news.  As reported in the Post and New York Times, Fannie Mae is letting thousands of renters remain in their homes this winter even if their landlords lost the properties due to foreclosure.  Many of these renters had been faithfully keeping up with their payments, but suddenly faced eviction because their landlords got in trouble.  POGO applauds Fannie's new policy, which will keep thousands of people off the streets this holiday season, and hopes that Freddie Mac and private banks will soon follow suit.

-- Michael Smallberg

Comments

[David Dzidzikashvili]

I think it was a right decision to limit CEO salaries at 500K for the companies that are getting taxpayer money. In general I strongly disagree with government intervention in private business matters, but since these companies are utilizing my money and your money and the money that belongs to all Americans, we have the right to limit their payroll, especially after the embarrassing facts of CEOs using bailout money for lavish parties, private jets and unreasonable bonuses. Once they pay us back the money owed, they can have all the bonuses and salaries they want.