President Obama Flexes Political Muscles - Limits on Bail Out

by Pythiian1 | February 4, 2009 at 01:25 pm

531 views | 68 Recommendations | 16 comments

"Shameful." That was the President's response last Thursday, to the news that Wall Street had given $18 billion in bonuses, even after the government had already propped up many of Wall Street's most prominent firms.

"We all need to take responsibility," President Obama said. "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 customary lavish bonuses....[T]hat's exactly the kind of disregard of the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else."

President Obama uses his bully pulpit to announce earlier today, Feb.4, that he is imposing a cap of $500,000 on the compensation of top executives at companies that receive "exceptional" federal assistance under the new economic stimulus plan. Read the full text of President Obama's remarks on executive compensations.

President Obama announced on Wednesday a salary cap of $500,000 for top executives at companies that receive the largest amounts of money under the $700 billion federal bailout, calling the step an expression not only of fairness but of “basic common sense.” The restrictions, however, allow an exception for restricted stock.

The guidelines focus on companies that, going forward, accept the bail-out money from the Department of Treasury, such as Citigroup, Inc., and American International Group, Inc. (AIG), General Motors (GM), Bank of America, and Chrysler.

Under the Troubled Asset Relief Program (TARP), the Treasury Department has allocated about half to shore up the banking system through direct capital injections. The Treasury Department has also funneled money into American International Group (AIG) and some for the automakers' industry.

But Citigroup, Bank of America and the American International Group, General Motors and Chrysler were all facing acute problems. And top executives at those companies made far more than $500,000 in recent years.

"People are still getting huge bonuses despite the fact they're getting taxpayer money, which I think infuriates the public," President Obama said in an interview with Anderson Cooper on CNN last night, Jan.3.

The new rules also touch on firms that participate in "generally available capital access programs," such as the Treasury's Capital Purchase Program. Senior executives at those banks will be subject to the $500,000 compensation cap, though the cap can be waived after full public disclosure and a shareholder vote. Under current rules, the firms were required to review and certify that their top five executives' compensation arrangements did not encourage excessive and unnecessary risk-taking.

Secretary of Treasury Timothy Geithner also warns those companies that come to Washington D.C. begging for money will face tougher rules and preconditions upon accepting assistance from the Treasury Department.

“Exceptional assistance” companies wanting to pay executives more than $500,000 will have to do so by using stock that cannot be sold or liquidated until the government money is paid back.

In other words, executives of those companies receiving the bail-out money will be prohibited from receiving any bonuses above their base pay. Although they could receive additional compensations through restricted stock that would not be vest until the money is repaid to the taxpayers.

In a letter to Congress last month, Lawrence H. Summers, director of Mr. Obama’s National Economic Council, suggested that the new pay restrictions would apply to all companies that get federal help.

Without mentioning a particular dollar limit, Mr. Summers wrote that “executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid.”

Executives of firms that have received capital infusions already face restrictions on payments. For one thing, there is a provision prohibiting participating banks from deducting from their taxable income more than $500,000 a year for base salary paid to each of their five most senior executives.

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Roy C

at 14:05 on February 4th, 2009

We own the banks, and we, the stockholders, do the hiring and firing and set the salary caps and all.

Don't like it. Too bad. Get a job at another bank. Oh? There aren't any? Too bad.

Roy C

at 14:19 on February 4th, 2009

Thanks.

Amy Judd

at 15:39 on February 4th, 2009

Good for him for doing this - he is right in what he says

Pythiian1

at 20:33 on February 4th, 2009

Thanks so much Amy for your comment and recommendation. I agree that he has to limit the CEOs from those companies that accept government bail-out from abusing the public funds. The Wall Street Journal has a blog complaining that many of these investment banks' employees are just like "every other American" except that they're sadder at being forced to give up their Hampton homes and other comforts in their lives...

Pythiian1

at 19:48 on February 4th, 2009

Thanks Roy C and Moonwolf for your comments and recommendations.

158

at 18:57 on February 4th, 2009

Obama is going to have to learn to work with others rather than flexing political muscles.

If he does he will accomplish much more.

Pythiian1

at 21:53 on February 4th, 2009

Thanks 158 for your comment and recommendation.

I'm not sure what you're referring to, but my piece is about President Obama warning those Wall Street companies that there will be limits and conditions whenever they come begging for the bail-out monies that are taxpayers' monies. There will be no more luxurious jets, lavish office refurbishing, expensive company trips to resorts and spas whenever these companies accept the bail-out monies.

Even Donald Trump, the ultimate capitalist supports President Obama in his current position toward those avaricious Wall Streeters.

So far, President Obama has been working with the Republicans, and even appointed two Republicans to Cabinet positions - Transportation and recently, Commerce.

Karen Hatter

at 14:37 on February 5th, 2009

President Obama appointing Republicans to his Cabinet should qualify as 'reaching across the aisles' in a big way.

Republicans seem to need to learn that as the Obama administration seeks bi-partisanship, bi-partisan cannot be defined as giving in to many of the same Republican methodologies they continue to espouse, many of the actions that have aided in bringing the country to where it has now landed.

Sanjay Jha

at 19:19 on February 4th, 2009

Again good post. I think President Obama is showing the light to these wall street executives who don't know the reality outside their high profile life. Even though world is suffering from major economic crisis brought upon by these guys they don't hesitate in taking a big bonus, what a shameful act indeed. President Obama has taken a very judicious decision of capping a figure for these high flying executives.

Pythiian1

at 19:41 on February 4th, 2009

Thanks so much Sanjay for your comment and recommendation. I agree with your views as I mentioned above in my response, President Obama has every reason to put a limit on those executive salaries whose companies have chosen to accept the bail-out monies.

The public is fuming about these investment bankers who abuse the public trust and government bail-out money, and rightly so.

hkubby (not verified)

at 12:15 on February 6th, 2009

I think these crooks should use their own money to bail out their companies. Why should the gov't help them? The gov't gives them the opportunity to run/open these businesses and do business as they please..they screw up the economy...and they basically get a pat on the back and MORE money? I think its ridic.