By John W. Schoen Senior producer
msnbc.com
updated 2/8/2009 7:21:22 PM ET 2009-02-09T00:21:22

The government is expected Monday to announce new terms for the ill-fated $700 billion financial bailout package, including pay limits on top executives at banks that take taxpayer money. Based on past efforts to rein in executive pay, the search for loopholes will begin before the ink on the new rules is dry.

If the government requires a $500,000 cap on executive pay for companies that are receiving a federal bailout, do you think that will include their bonus as well? It seems that in many situations that the bonus is more than their base pay.
Tom, Cincinnati, Ohio

That’s just one of many loopholes that will likely doom the government’s efforts to cap executive compensation — a mission Congress has been trying to accomplish for nearly two decades.

Let’s start with the question of who, exactly, is going to be subject to those limits. Bankers who have already taken government bailout funds before the restrictions went into place won’t be covered.

The salary caps also apply only to “top executives” which refers to your place on the organizational chart, not the size of your paycheck. It’s not uncommon for the biggest, multi-million-dollar payouts to go to traders or investment managers who generate substantial profits that work on lower rungs of the corporate ladder. (Some compensation experts suggest top executives subject to the limits could ask for a different title that takes they out of the reach of pay restrictions.)

It’s not the first time Congress has tried to narrow the gap between the highest- and lowest-paid workers in corporate America. As executive pay packages began to soar in the early 1990, Congress passed a law in 1993 that limited a corporation’s tax deduction for executive pay to “only” $1 million.

To get around the limit, companies began sweetening top executives paychecks with stock options — which let you wait to buy company stock until after you’re sure it’s gone up. But you get to buy the shares at the price they traded on the day you got the option, making it a no-lose bet.

That brought on a stock options scandal in which companies would “backdate” the official record of when the stock option was granted. Now, you didn’t even have to wait for the stock to go up. The company just picked a past date when the stock prices was low and let you buy now-higher-priced shares for an instant profit.

There are plenty of other “workarounds” to pay limits, including a variety of forms of “deferred” compensation. One simple way is to beef up a pension so future payments don’t count as current compensation. To get around restriction on current pay, some companies “gross up” key executive salaries, essentially having the company pick the tab for paying their income taxes.

There’s a cottage industry out there of “compensation consultants” who are themselves paid very well to come up with these arrangements. No matter what limits Congress comes up with, it’s a pretty good bet these experts will find a way around them.

Just like the old saying: If you build a ten-foot wall, someone will always come along with an 11-foot ladder.

Why does a homeowner have to be behind in their mortgage payments to qualify for assistance? I make the mortgage payment every month, but it's a struggle, but I don't know how much longer I can do that. Would it be better to let the mortgage lapse for a few months? Maybe then the lender will consider a refinance or loan modification.
Laurita, Atlanta, Ga.

There’s no rule that says you have to be behind on your mortgage payment to get help from your lender modifying your loan to more affordable terms.

That's the real problem: There are no rules.

Two years after the housing market began to come unglued by a wave of rogue lending, Congress is still discussing various proposals to try to head off another wave of foreclosures that is expected to crest this year and next. Many of the loans written during the height of the lending bubble are schedule to “reset” to higher payments between now and 2011.

Unless something is done to diffuse this ticking bomb, the continued flood of foreclosed homes will push prices even lower, delaying the end of the housing market’s slide. And until the housing market recovers, it’s hard to see how the larger economy can get back on its feet.

So far, the government’s effort to get lenders to modify mortgages has had little impact. Part of the problem is that the process of securitizing mortgages created such a complex financial mess that no has figured out how to unscramble it. It’s the flip side of the problem that has stymied government efforts to clean up the mess of “toxic assets” clogging up the banking system. Those are the very assets backed by mortgages that need to be modified — which the $700 billion bailout has failed to address.

The revised terms of the second half of that bailout could include measures to try to stop foreclosures. (Details are expected to be released Tuesday .)

Last month, a bill in the House called for spending as much as $100 billion of the remaining bailout funds to prevent foreclosures. But the proposal was short on details of how it would work.

Some Democrats in Congress are also working to get funding for plan proposed by FDIC Chairwoman Sheila Bair, who developed a program to help homeowners after the government seized the failed IndyMac bank. The plan involves providing government guarantees for lenders who participate in modifying loan terms. It also provides a $1,000 bonus per modification to the lender as a financial incentive — one of the so-called “carrots” the government is considering.

The ultimate solution, thought, will likely require some kind of “stick” to get lenders moving more aggressively to modify mortgages. The most effective proposed so far — dubbed “mortgage cramdown” by the lending industry — would let bankruptcy judges modify loan terms from the bench, just as they do with every other form of debt involved in a bankruptcy.

The lending industry claims the measure would raise borrowing costs because of the higher risk that a borrower would end up in bankruptcy court. Academic studies dispute that claim.

In any event, it might not be such a bad idea for the lending industry to charge higher rates to risky borrowers — or maybe not lend to them at all. If those policies were in place before the mortgage bubble spun out of control, we probably wouldn’t be left with so many bad mortgages to clean up.

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