Bernanke backs clamp down on pay

The White House and Federal Reserve moved Thursday to clamp down on executive pay at companies bailed out by taxpayers and at financial firms thriving during the recession.

President Barack Obama’s pay czar announced he would be slashing the salaries of 175 executives at seven companies that have yet to pay back bailout money in the past year.

Hours later, the Federal Reserve board said bank regulators would begin reviews of top banks’ compensation and use its regulatory authority to demand changes to excessive pay packages.

The two moves targeting excessive pay are a response to public outrage over the bailouts that began in the fall of 2008 and Wall Street’s swift recovery since then. This month, when the jobless rate rose to 9.8 percent, a 26-year high, the Dow index hit 10,000 for the first time since before the recession. And Goldman Sachs and other investment firms reported hundreds of billions of dollars in profit.

The rising sentiment for more action against corporate America was also felt Thursday on Capitol Hill, where a House committee reported out a bill creating a new regulatory agency for home loans, credit cards and other consumer financial products.

Obama said that the plan unveiled by Kenneth Feinberg, the Treasury Department’s special master for compensation, was “an important step forward” in ending the influence of excessive pay while also allowing companies to succeed.

“We believe in success,” Obama said. “But it does offend our values when executives of big financial firms — firms that are struggling — pay themselves huge bonuses, even as they continue to rely on taxpayer assistance to stay afloat.”

Feinberg’s plan seeks to halve the salaries for the top 25 highest earners at American International Group (AIG), Bank of America, Citigroup, General Motors, General Motors Acceptance Corp. (GMAC), Chrysler and Chrysler Financial.

Feinberg said he was “extremely sensitive” to public outrage. The pay levels proposed by the bailed-out companies were “inconsistent with the public interest,” he said. His plan would force companies to pay much of executive salaries in stock instead of in cash, tie bonuses to company performance and require federal permission for perks costing more than $25,000.

“The taxpayers are in deep with these seven companies, and one of my primary obligations is to see to it that these taxpayer dollars are returned to the U.S. Treasury,” Feinberg said.

Feinberg’s proposals won’t apply to executives at Goldman Sachs, Morgan Stanley and other investments banks because they have already paid back money from the Troubled Asset Relief Program (TARP), the formal name for the $700 billion Wall Street bailout.

But the proposal announced by Federal  Reserve Chairman Ben Bernanke would institute federal reviews for compensation at those banks.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Bernanke said Thursday. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

Under the Fed’s plan, federal regulators would review compensation packages and could change credit ratings at those banks where executives took excessive risks for short-term gains.

“In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system,” said Federal Reserve Board Governor Daniel Tarullo.

Lawmakers’ reaction to proposed executive compensation limits mostly broke along party lines.

Republicans criticized the proposal coming from the Treasury Department, arguing that it represented government intervention in the private market.

“I have a visceral reaction against so much government involvement in free enterprise,” said Senate Republican Conference Chairman Lamar Alexander (Tenn.).

Democrats, however, applauded the effort and pushed for more regulation.

“I think it’s going to speed up TARP repayments,” said Rep. Barney Frank (D-Mass.). “If they don’t like it, pay it back.”

Frank, chairman of the House Financial Services Committee, on Thursday shepherded legislation through his panel to create a consumer financial protection agency. The bill was reported out largely along party lines and opposed by the American Banking Association and other financial organizations.

Sen. Charles Schumer (D-N.Y.), a longtime advocate in Washington for Wall Street, called for more restrictions on executive pay and financial firms that were bailed out.

In a letter Thursday to Feinberg, Schumer called for the seven companies affected by the new pay plan to “significantly revamp their corporate governance across the board” to prevent conflicts of interest and other practices at the board of directors level.

He pointed to his “Shareholders’ Bill of Rights” legislation, introduced in May with Sen. Maria Cantwell (D-Wash.), to require that: companies allow shareholders a greater role in nominations to a company’s board of directors; board members be reelected annually; board members receive at least 50 percent of a vote in uncontested elections; and public companies create a separate “risk committee” with an independent board.

Schumer, who has received more campaign donations from financial-services firms than has any other senator, told The Hill the economic meltdown changed the rules for Wall Street.

“We’re in a different world here, and if you get bailout money, the same practices can no longer continue to exist, period,” he said.

Silla Brush and J. Taylor Rushing contributed to this article.

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