New TARP Rules: Curb Executive Pay, Bonuses, Parachutes
Former Treasury Secretary Paul O'Neill calls pay limits "a large mistake."
Feb. 4, 2009 — -- Wall Street was bearish today over President Obama's new $500,000 pay limit for executives of financial institutions who he said have come "hat in hand" asking for taxpayers' help.
The new limits, which would affect banks that accept "exceptional assistance" from the public treasury, would also impose stricter rules on golden parachutes, entertainment, holiday parties, conferences and the use of corporate jets.
Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, expressed concerns about the new executive compensation restrictions.
"The pay scale for Wall Street is different for the pay scale for America," Talbott told ABC News. "So these numbers look large, but the market value for these executives - there's a very small talent pool of individuals that have the education, experience and knowledge to operate a global, international services firm in this day and age."
Executives may quit banks that fall under the new $500,000 pay limits, he warned.
"I don't think the issue is a dollar amount. It's being paid what you're worth… Would you be willing to work for less than what you think you're worth?" Talbott asked.
The compensation limits might also make banks hesitant to ask the federal government for help.
"Companies will have to reevaluate whether the benefits are still worth it under the new rules," he said.
Former Treasury Secretary Paul O'Neill said Obama's move "is going to be a very popular populist move.... even though I think it is a large mistake."
O'Neill, who served under President George W. Bush, told ABC News that the banks would have complied if Obama had asked them to voluntarily follow the new limits. He also pointed out that many of the banks' employees get annual bonuses, not just the top executives. Should the limits apply to them, too, O'Neill asked.
He also said the pay limits could hurt the banks' ability to compete. "To the degree there are competing institutions out there not affected by the new edict, does this give those institutions a significant competitive advantage in attracting talent?"
White House spokesman Robert Gibbs dismissed suggestions that the pay caps could hurt the already ailing banks.
"I think we've struck the right balance," Gibbs said.
Obama's pay limits were endorsed by House Minority Leader John Boehner, a Republican from Ohio.
"I think if anybody is looking to the taxpayer to help bail their company out, these kinds of executive compensation limits are appropriate," he said.
On the $500,000 pay limit, Boehner said, "I think somebody's got to pick a number. The president has picked one. I applaud him for doing it."
ABC News contacted all 30 institutions that received $1 billion or more in bailout money, and most of them ignored the calls or declined to comment.
GMAC, which got $5 billion, said it is already subject to compensation limits imposed by the Bush administration. "We intend to comply with those requirements. We have no further comment," GMAC said.
In scolding language, the president said that the changes are necessary to help stabilize the economy.
"We've got to restore trust," Obama said. "And in order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street."
The president echoed his inauguration address when he said there would be a "new era of responsibility."
"We all need to take responsibility," he said while announcing the new compensation rules with Treasury Secretary Tim Geithner. "And this includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves their customary lavish bonuses."
"What gets people upset – and rightfully so – are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers," Obama said.
The $500,000 salary limit is still more than Obama makes -- $400,000 -- but is a pittance compared to the $20 million that Kenneth Lewis took home in 2007 as head of Bank of America, a corporation that needed $45 billion of public money to save it from its mountain of bad loans.
The president said the new rules announced today would be accompanied by an effort to determine "how corporate governance and compensation rules can be reformed."