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."
Exceptions to the New Rules
There are exceptions to the new executive pay rules, however.
Banking executives can get extra compensation in restricted stock, but only stock that will not vest until taxpayers are repaid the loans, plus interest.
Companies bailed out by Uncle Sam are permitted to waive the $500,000 rule if they disclose executive compensation and allow investors a nonbinding vote on executive pay.
Banks that have already received several hundred billion dollars from the Troubled Asset Relief Program under the Bush administration won't be subject to the new rules. But several of those banks are expected to come back to the federal till for additional relief.
The new Obama TARP rules will require those companies to demonstrate they have complied with the previously issued restrictions on executive pay and lending requirements, and agree to strict monitoring and oversight going forward.
The new rules also make it harder for corporate titans to live the high life on the public dollar. They include restrictions on how the money can be spent, with a bull's-eye on such items as aviation expenses, office renovations, entertainment and corporate parties.
The new Treasury provisions expand rules established under the Bush administration. Restrictions on golden parachutes originally applied to only the top five executives of an affected bank. That will now be extended to the top 10 officials, and golden parachutes for the next 25 top officials will be limited to one year's pay.
Clawback rules that would require banking officials would have to return bonuses if found to have falsified reports. Those rules originally applied to a bank's top five executives, but under the rules detailed today that would be extended to the top 25 bank officials.
The public has been repeatedly infuriated by examples of federally subsidized bankers still spending lavishly on themselves while laying off tens of thousands of employees and of retirement nest eggs vaporized.
Obama called it "shameful" last week when it was reported that bankers had handed out $18.5 billion in bonuses at the end of 2008, despite the dreadful year of financial losses. The White House had to intervene to persuade Citigroup to abandon plans to buy a $50 million executive jet after getting its $45 billion boost. Merrill Lynch's former CEO John Thain had to be shamed into personally repaying the $1 million he spent on renovating his office while surviving on an additional $45 billion public loan. Bank of America partied hardy at the Super Bowl last weekend. And this week, Wells Fargo reluctantly canceled a corporate outing to Las Vegas.
GOP Emboldened By Obama Stumbles
The new rules should bring a cheer from a frustrated public, a sound that the Obama White House hasn't heard in a while. The withdrawal of two top appointees this week because they hadn't paid all their taxes even prompted the president to repeatedly apologize Tuesday for not adhering to the ethical standard he had publicly set for his administration.
"This was running the possibility of really hurting his reformist image," George Stephanopoulos, ABC News' chief Washington correspondent, told "Good Morning America" today.
The withdrawal of former Senate Majority Leader Tom Daschle was particularly damaging because Daschle was going to be the health and human services secretary and the point man on Obama's efforts to reshape the country's health-care system.
The stumbles could also embolden Republicans who are opposing large parts of the president's economic stimulus package.
"The president's going to have to agree to some changes right now," Stephanopoulos told "GMA."
Obama will meet today with Sen. Bill Nelson, D-Neb., and Maine's two Republican senators, Olympia Snowe and Susan Collins. The trio are spearheading a centrist group of Democrats and Republicans working to reshape the stimulus bill.
"There will still be differences with this group," Stephanopoulos said. "The president doesn't want to bring the package down as far as some of these senators want to go. But they're going to be working intensively on a compromise today."
ABC News' Dean Norland and Eileen Murphy contributed to this report