February 12, 2009

Whitehouse Authors Bill to Recoup Billions in Bailed-Out Banks’ Executive Pay

Measure Requires Banks to Cut Deferred Compensation as a Condition of Federal Help

Washington, D.C. – As the Obama Administration unveiled stricter limits on future executive compensation as part of its plan to shore up the nation’s shaky financial sector, U.S. Senator Sheldon Whitehouse (D-RI) introduced legislation to help taxpayers recoup billions of dollars in deferred compensation already on the books at banks that receive, or have already received, taxpayer assistance under the federal bailout program.

The Wall Street Journal estimated that banks receiving bailout funds owed their executives at least $40 billion in deferred pay, including bonuses, and executive pensions, as of the end of 2007. Nothing in the original Troubled Asset Relief Program (TARP) prohibits firms from using bailout funds to pay these liabilities. Indeed, news reports abound of egregious expenditures by bailed-out banks, including Citigroup’s aborted attempt to purchase a $50 million luxury private jet.

“American taxpayers cannot and will not pay to support the Wall Street culture of lavish self-indulgence that helped get us into this mess in the first place,” Whitehouse said. “When we step in to stop banks from failing, we should not be bailing out excessive compensation liabilities.”

Had the banks not been bailed out and had they filed for bankruptcy, the deferred compensation would have been paid out at pennies on the dollar, if at all. Because taxpayer support is helping keep these firms afloat, Whitehouse’s legislation would, in effect, enable the government to reduce a bank’s deferred compensation obligations to reasonable levels as a condition of its participation in the TARP.

The bill, which Whitehouse first discussed in a speech on the Senate floor last month, would create a Temporary Economic Recovery Oversight Panel to examine and readjust, at the government’s request, the deferred compensation obligations of TARP participants. A due process hearing would give the reductions finality equivalent to a bankruptcy order.

“[I]f we don’t make some reasonable adjustments [in executive compensation], that failure will so damage public credibility and faith in the entire exercise – in addition to being profoundly unfair in fact – that it will eliminate or diminish our ability to manage the crisis,” Whitehouse said in January.


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