Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps

By Matthew Benjamin and Christine Harper

Feb. 5 (Bloomberg) -- Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.

The rules, created in response to growing public anger about the record bonuses the financial industry doled out last year, will apply only to top executives at companies that need “exceptional” assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more.

The new guidelines are the first salvo in a broader financial-rescue plan Obama plans to announce next week. The president and Congress have had to defend billions in aid to banks that continue to provide generous bonuses and luxury perks while posting record losses. Pay caps may provide the political cover the administration needs to deliver additional infusions of capital into the financial sector that may be necessary.

Some analysts said the new rules wouldn’t have much effect.

Obama, 47, “is not proposing to go back and get that $18.4 billion in bonuses back,” Laura Thatcher, head of law firm Alston & Bird’s executive compensation practice in Atlanta, said of the cash bonuses New York banks paid last year, the sixth- biggest haul in history. “Right now, we have not clamped down” on pay at banks.

Huge Paydays

In addition, some executives may be compensated for the potential reduced salaries with restricted stock grants, which may result in huge paydays after the bank repays the government assistance with interest.

“They’re just allowing companies to defer compensation,” said Graef Crystal, a former compensation consultant and author of “The Crystal Report on Executive Compensation.”

The restrictions are “a joke,” he said, because “if the government is paid pack, you can be sure that the stock will have risen hugely.”

According to the new guidelines, announced at the White House yesterday by Obama and Treasury Secretary Timothy Geithner, senior executives at banks that negotiate “exceptional assistance” deals with Treasury, such as the targeted relief provided to Citigroup Inc. last November or to Bank of America Corp. in January, would be limited to annual compensation -- salary plus bonus -- of $500,000.

Office Redecoration

Other perks that enraged Americans -- such as a $1.2 million office redecoration by the chief executive of Merrill Lynch & Co., which took $10 billion in government funds, or a four-day Las Vegas junket for executives at Wells Fargo & Co., which accepted $25 billion -- will be subject to new disclosure rules.

A White House official called it the name-and-shame provision, based on the idea that banks would limit such benefits if forced to disclose them.

“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,” Obama said yesterday.

Yet none of the new rules will apply to any firm until it negotiates an extraordinary deal with the federal government to remain solvent.

‘Double Dippers’

“What I’m a little bit surprised by is that those pay restrictions don’t apply to what I would call the double dippers, which is basically Citigroup and Bank of America, which have come back for capital,” said Charles Peabody, an analyst at Portales Partners LLC in New York. Both banks received money under the Treasury’s $700 billion Troubled Asset Relief Program, and required additional bailout funds and a government guarantee of their assets.

The Financial Services Roundtable, a Washington-based trade group representing banks, called the restrictions “a measured response” in a news release yesterday.

For some firms, the rules are insignificant. Morgan Stanley is among companies that don’t expect the restrictions to affect their business because they foresee no need for additional government help.

“We have one of the highest Tier 1 capital ratios among financial services firms, so we do not anticipate the need for additional government capital,” said Mark Lake, a spokesman for Morgan Stanley in New York, when asked about the new restrictions.

Repaying TARP

Goldman Sachs said yesterday it wants to repay $10 billion it got from Treasury under the TARP to signal the firm is healthy and to escape limitations that came with that infusion of money. “Our financial condition is sound and, subject to approval from regulators, we hope to repay TARP money as soon as practicable,” said Lucas van Praag, a spokesman for New York- based Goldman Sachs.

JPMorgan CEO Jamie Dimon said Feb. 3 that the firm didn’t need capital and didn’t ask for TARP funding. The lender accepted the $25 billion it received from the first capital injection at the request of the government and to help stabilize the banking system, he said.

Other restrictions on banks that get major new bailout packages include a “say on pay” provision that would require new executive pay packages to be subjected to nonbinding shareholder resolutions. Companies also must have in place provisions to reclaim, or “claw back,” bonuses and incentives from the top 25 senior executives if they are found to engage in deceptive practices. Bans on so-called golden parachute severance payments will be extended to more executives.

Treasury Discretion

Jen Psaki, a White House spokeswoman, said Treasury “will have discretion to apply” the restrictions “to the top leadership of the firm, but the size of that group will vary depending on the structure and size of the institution.”

Some of the new rules, including disclosure of luxury perks and the ban on golden parachutes, will also apply to banks taking part in generally available government capital programs, similar to the TARP, which has provided capital to some 360 financial institutions so far. The rules do not apply retroactively to TARP participants, however.

White House spokesman Robert Gibbs said the rules weren’t intended to be “overly punitive,” while a senior administration officials said their primary goal is to align the interests of top executives at bailed-out firms with those of shareholders, who now include U.S. taxpayers.

Right Direction

Nell Minow, founder and president of the Corporate Library, a corporate-governance research company in Portland, Maine, said the rules are in the right direction.

“Not allowing the restricted stock awards to vest until the government’s been paid back goes a step toward the goal,” she said.

Bill Black, a professor of economics and law at the University of Missouri-Kansas City, said the entire Wall Street pay structure is dysfunctional and needs to be revamped.

“Compensation is the root that created the perverse incentives and led to the current financial crisis,” he said.

Yet the new guidelines won’t bring about that change, said Sharyn O’Halloran, a professor of political science at Columbia University in New York.

“The goal is for accountability and the argument is that if a large portion of executive pay is based on excessive risk- taking, then you would anticipate them taking excessive risk,” she said.

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net .

Last Updated: February 5, 2009 00:01 EST

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