Finance Globe

U.S. financial and economic topics from several finance writers.
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Pay Caps for Executives of TARP Fund Recipients

Today President Barack Obama and the U.S. Treasury Department announced new restrictions on executive pay for institutions that receive government aid from TARP funds.

"These measures are designed to ensure that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial system and not toward inappropriate private gain," said the Treasury.

The new rules come just a week after President Barack Obama sharply criticized Wall Street bankers for giving themselves over $18 billion in bonuses over the past two months. Obama said that for executives to take such bonuses even as their institutions lost billions in profit and received billions in taxpayer money is "at the height of irresponsibility. It is shameful."

The American public has long been feeling the pain of the collapse of the housing market and the shrinking job market, and many citizens are simply fed up with the way Wall Street banks have been spending their tax dollars as if the party is still going on.

These new rules should help prevent much of the overspending, abuse, and sneakiness that many taxpayers and lawmakers are fed up with.

The new regulations are not retroactive - institutions that have already received assistance won't be affected by the pay limit restrictions - but they will have to agree to strict monitoring and oversight.

A mandatory $500,000 pay cap for executives has been imposed for financial institutions that receive "exceptional" assistance through TARP funds. Executive pay must be fully disclosed and subject to a "say on pay" shareholder resolution.

Exceptional assistance applies to institutions that negotiate with the Treasury for agreements specific to that institution's needs, such as AIG, Bank of America, and Citigroup have done in the past.

Any bonuses paid to executives above the $500,000 cap must be in the form of restricted stock that can't be cashed in until either the government is paid back or "or after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards."

The ban on golden parachutes has been raised to the top ten executives, up from the earlier restrictions on the top five. And golden parachutes for the next 25 executives is limited to the equivalent of one year's pay.

But the vast majority of institutions that receive TARP funds participate in the generally available capital access program. This program has the same terms for all recipients, limits on the amount each institution may receive, and specified returns for taxpayers. The Capital Purchase Program is an example of a generally available capital access program.

Institutions that participate in the generally available capital access program will also be subject to a $500,000 pay cap for executives, but that can be waived with full public disclosure and a shareholder vote, and if requested, a non-binding "say on pay" shareholder vote. Also, the top five executives cannot receive a golden parachute greater than one year's pay, down from the earlier provision that allowed up to three year's pay.

Limitations for either exceptional or general assistance recipients include bonus clawbacks for the top 25 senior executives who knowingly provide inaccurate information for calculating their incentive pay. The program's earlier regulations held only the top five executives subject to a clawback provision. Also included are provisions to increase transparency in spending on luxury items such as airplanes, parties, remodeling, events, entertainment, and other business non-essentials.

President Obama said, "This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.

"For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste — it’s a bad strategy — and I will not tolerate it as president. We’re going to be demanding some restraint in exchange for federal aid — so that when firms seek new federal dollars, we won’t find them up to the same old tricks.

"We're asking these firms to take responsibility, to recognize the nature of this crisis and their role in it," he continued. "We believe that what we've laid out should be viewed as fair and embraced as basic common sense."

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Saturday, 22 June 2024

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