Sliding Around The Executive Comp Rules

The Washington Post is out with a story about the Obama administration’s plan to bypass the law regulating executive compensation for recipients of government aid. 

You probably remember all of the angst that accompanied TARP. Amid all of the debate, rightly or wrongly, Congress saw fit to impose restrictions on executive pay and bonuses for those who received federal bailout money. President Obama backed the intent of the legislation when he said, “We’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.”

Apparently he believes that only some compensation packages should be subject to the law. His administration is now working to structure further assistance in such a way that the participants will not be required to adhere to the law’s strictures.

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay.

The administration has decided that the conditions should not apply in at least three of the five initiatives funded by the rescue package.

So the administration, rather than going back to Congress and telling them that they have a problem that needs fixing, has decided that they need only need adhere to the letter of the law not the spirit. As the Post points out, their solution relies on some rather questionable strategies.

In one program, designed to restart small-business lending, President Obama’s officials are planning to set up a middleman called a special-purpose vehicle — a term made notorious during the Enron scandal — or another type of entity to evade the congressional mandates, sources familiar with the matter said.

In another program, which seeks to restart consumer lending, a special entity was created largely for the separate purpose of getting around legal limits on the Federal Reserve, which is helping fund this initiative. The Fed does not ordinarily provide support for the markets that finance credit cards, auto loans and student loans but could channel the funds through a middleman.

At first, when the initiative was being developed last year, the Bush administration decided to apply executive-pay limits to firms participating in this program. But Obama officials reversed that decision days before it was unveiled on March 3 and lifted the curbs, according to sources who spoke on condition of anonymity because the discussions were private.

Obama’s team is also planning to exempt financial firms that participate in a program designed to find private investors to buy the distressed assets on the books of banks. But Treasury officials are still examining the legal basis for doing so. Congress has exempted the Treasury from applying the restrictions in a fourth program, which aids lenders who modify mortgages for struggling homeowners.

Note that Congress has already made an exception to the law for firms modifying mortgages. In that case it’s a bit confusing as to why the administration feels it needs to operate in the shadows rather than just making its case for further exemptions. If nothing else, it seems to be politically dumb. At the same time, it’s another disturbing example of the administrations tendency to exceed its constitutional authority.

The administration was not above using the issue of executive compensation for political purposes. Having done so, it now finds itself confined by the very rules that it encouraged. Perhaps we can learn that something from this. Maybe along the lines that you either regulate compensation entirely or you get out of the business of doing so. Once again half-pregnant doesn’t work well.

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