Over the White House's objections, Sen. Chris Dodd inserted strict rules into the $787 billion economic stimulus package limiting bankers' bonuses.
Exec pay cap = Sen. Dodd job protection?
by Frank James
You don't have to be a Wall Street money magnet to be concerned about the unintended consequences from a provision tucked into the $787 billion economic stimulus bill that would limit executive pay.
Reports for a few days have said Sen. Chris Dodd placed in the legislation limits on bonuses and other compensation for senior executives whose companies receive federal money.
The New York Times has a report with a good description of the limits.
The pay restrictions resemble those that the Treasury Department announced this month, but are likely to ensnare more executives at many more companies and also to cut more deeply into the bonuses that often account for the bulk of annual pay.
The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full...
... The revised rules do not impose a formal cap on executive compensation, unlike the Treasury proposal. Under that plan, banks were barred from paying more than $500,000 in salary until they repaid the TARP funds to the government. (Banks were permitted to offer bonuses in restricted stock.) Senator Dodd's rules, however, go a step further, prohibiting banks from awarding restricted stock to 25 top executives equal to more than one-third of their annual cash compensation until the banks have repaid all the money owed.
In addition, the Congressional rules would affect not just a bank's top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.
As sources quoted by the NYT and others say, one unintended consequence is that financial institutions will just raise salaries to offset the limits on bonuses.
Another is the risk of a brain drain at the very time when the financial industry and the economy can least afford it.
Yet another possibility is that financial institutions will repay the federal money they received sooner than they would have otherwise to get out from under the restrictions.
There's a requirement in the Troubled Asset Relief Program that if a bank repays the government it must then raise replacement capital in the private markets. Banks may just decide to go that route at greater expense and risk to themselves.
Then there's always the chance that banks that could use the cash to strengthen their balance sheets will forgo it altogether or wait until they are forced by federal regulators to take federal money.
Fearing any and all of these possibilities, the Obama Administration opposed Dodd's limits. Yet Dodd insisted on them.
Why, especially since so many of the bankers who will be affected are his wealthiest constituents living in Greenwich, Conn.?
Perhaps he's really angry at Wall Street types and wants to crack down on them. even though many are presumably his friends.
Here's another possibility worth considering. Though there are a lot of wealthy Wall Streeters in Connecticut, there are a lot more middle-class people there. And Dodd needs those middle-class votes next year in what could be a very challenging re-election bid.
Part of what makes it so difficult is Dodd, Senate Banking Committee chairman, was a "friend of Angelo" as in Angelo Mozillo, the former CEO of Countrywide. As such Dodd received mortgage loans at favorable interest rates.
Being a one-time friend of Angelo's has made Dodd seem much less a friend of the people. Quinnipiac University has a recent poll that suggested that Dodd could be vulnerable.
As CNN reported:
Fifty-one percent of registered voters in Connecticut questioned in a Quinnipiac University survey released Tuesday say they definitely won't or probably won't vote for Dodd in November 2010, when the five-term Democratic senator is up for re-election. Forty-two percent say they'll definitely or probably vote for Dodd.
Only 41 percent of those surveyed approve of the way Dodd is handling his job, with 48 percent disapproving. That's Dodd's worst approval rating ever in Quinnipiac University polling.
The survey also suggests that a majority of Connecticut voters, 54 percent, say they are not satisfied with the senator's response to allegations that he received preferential mortgage treatment, with 24 percent saying they are satisfied with Dodd's explanation. Fifty-six percent indicate they are less likely to vote for Dodd in 2010 because of the controversy. And voters are split on whether Dodd is honest and trustworthy.
Dodd is chairman of the Senate Banking Committee, which has oversight over the banking industry and mortgages. Dodd's two mortgages through Countrywide Financial Corporation's VIP program are being investigated by a Senate ethics panel. The senator said he sought no special treatment from Countrywide when he refinanced his Washington, DC and Connecticut homes six years ago. He acknowledged participating in the VIP program, but Dodd said he thought the program gave upgraded customer service rather than reduced rates.
The Dodd provision in the stimulus legislation will certainly give Dodd a way to change the subject when Republicans hit him with the "friend of Mozillo" charge when his re-election campaign gets into high gear next year.
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