Banker Bonuses: Any Way to Get Them Back?

ABC News’ Reynolds Holding reports: President Obama called Wall Street bonuses paid by bailout recipients "the height of irresponsibility." Sen. Christopher Dodd promised to use "every possible legal means" to claw them back. Powerful politics, but legally speaking, it’s tough to imagine that the senator has a leg to stand on. Here are the legal approaches he could pursue, none of them a likely winner: Sue for Fraudulent Conveyance. New York and other states allow a creditor to force a debtor to get back certain payments that could hurt the creditor’s interests. So the government could sue the banks if they didn’t have enough capital at the time they paid the bonuses AND the recipients didn’t actually earn the bonuses i.e., the banks didn’t receive "reasonably equivalent value" for them. Even if the feds could overcome the capitalization hurdle (Merrill Lynch and Bank of America weren’t considered undercapitalized), it would be very tough to show that the bankers didn’t earn the compensation that they negotiated with their employer. Sue for Securities Fraud. The feds would have to show that bank executives somehow misled their board of directors about the bank’s financial condition, its employees’ performance or some other important fact that led to the payment of bonuses. It’s very unlikely the directors didn’t know what trouble the bank was in.

Demand Bailout Money Back. Officials could simply demand that the banks pay back bailout money in the amount of the bonuses. The problem is that there doesn’t seem to be any legal basis in each bailout agreement for doing so, and it would be difficult to take back bailout money that the government determined the bank still needed to survive. The banks could argue that the feds were guilty of laches: a legal term for the defense that the feds waited too long to say the bailout money couldn’t be used for bonuses. They could have made that a condition of the bailout in the first place. Pass a Law Requiring Repayment. The government could simply order bankers to return their bonuses, but that would almost certainly be an unconstitutional taking under the Fifth Amendment. Order the Banks to Claw Back the Bonuses. Banks could ask bankers to return their bonuses, maybe in return for the prospect of a bigger payday later, but requiring the bankers to cough up the money would probably violate their employment agreements as well as state wage and hour laws. Dodd’s best hope, it seems, would be to whip up public anger at the bonus payments so that the banks are shamed into returning a portion of the bailout money and agreeing not to pay bonuses while the money is outstanding. That’s no doubt what he had in mind in the first place.