Video: Obama slams bonuses paid with tax money

updated 10/22/2009 3:41:44 PM ET 2009-10-22T19:41:44

The Treasury Department on Thursday ordered seven companies that received billions of dollars in government bailouts to halve total compensation for their top executives. But the big reductions will not apply to pay earned before November.

Kenneth Feinberg, the Treasury official leading the pay review, told reporters that average salaries for the top 25 executives are being cut 90 percent starting next month.

The action will apply to the top executives at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

Meanwhile, the Federal Reserve unveiled a proposal Thursday that for the first time would police banks' pay policies to ensure they don't encourage employees to take reckless gambles like those that contributed to the financial crisis.

Unlike the Treasury plan, the Fed proposal would cover thousands of banks, including many that never received a bailout. But the central bank would not actually set compensation. Instead, the Fed would review — and could veto — pay policies that could cause too much risk-taking by executives, traders or loan officers.

The government did not want to make executives return compensation already received this year, but the reduced pay levels will be the base for making decisions on salary in 2010, Feinberg said.

The executives will still be subject to compensation limits as long as their companies are receiving support from the government's $700 billion bailout fund. Their total compensation was being cut in half, on average.

Feinberg got the job as pay czar earlier this year when Congress, responding to outrage about huge bonuses being paid to AIG, amended the bailout law to require that executive compensation at companies getting exceptional assistance be curbed.

He has been reviewing compensation packages since August and called many of the negotiations "intense."

Speaking earlier at the White House, President Barack Obama welcomed Treasury's decision and said Americans' values are offended by excessive paychecks for executives whose companies were bailed out by taxpayers. He urged Congress to pass legislation to give shareholders a voice in executive pay packages.

"It does offend our values when executives of big financial firms that are struggling pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat," Obama said.

Treasury Secretary Timothy Geithner also praised the outcome of Feinberg's deliberations.

"We gave him the difficult task of cutting excessive pay, striking a balance between compensation and risk taking and keeping strong management teams in place to help the economies recover — all in the public interest," Geithner said in a statement.

Smaller companies and those that have repaid the bailout money, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., are not affected by the plan.

Under the Fed proposal, the 28 biggest banks would develop their own plans to make sure compensation doesn't spur undue risk taking. If the Fed approves, the plan would be adopted and bank supervisors would monitor compliance.

At smaller banks — where compensation is typically less — Fed supervisors will conduct reviews. Those banks don't have to submit plans.

The Fed refused to identify the 28 banks that will have to submit plans. But Citigroup, Bank of America and Wells Fargo & Co. are usually included on such lists. Nearly 6,000 banks regulated by the Fed would be covered.

"The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do no create undue risk for the firm or the financial system," said Fed Chairman Ben Bernanke.

In the AIG trading division, the arm of the company whose risky trades caused its downfall, no top executive will receive more than $200,000 in total compensation for 2009. However, the issue of $198 million in bonuses that are to be paid to employees of the trading unit in 2010 still must be determined. The government has said it will push to see those bonuses reduced.

The giant insurance company has received taxpayer assistance valued at more than $180 billion.

The pay restrictions for all seven companies will require any executive seeking more than $25,000 in special benefits — things such as country club memberships, private planes and company cars — to get permission for those perks from the government.

Feinberg's decisions come days after administration officials voiced sharp criticism of plans by some firms, particularly those on Wall Street, to pay huge bonuses even as the country continues to struggle with rising unemployment and the effects of the recession.

Goldman Sachs, which has paid back its bailout money, has said it earmarked $16.7 billion for compensation so far this year, more than $500,000 per employee. Citigroup is paying $5.3 billion in bonuses to its employees and Bank of America $3.3 billion.

Elsewhere, Freddie Mac is giving its chief financial officer compensation worth as much as $5.5 million, including a $2 million signing bonus. The government-controlled mortgage finance company doesn't have to follow the executive compensation rules because it is being paid outside the TARP.

Congress passed legislation in February requiring Treasury to oversee pay at companies that took bailout money. Treasury created the pay czar's office in June as one means of implementing that law.

Treasury's rules require the special master to review pay for the 25 top earners at companies that received "exceptional assistance," examining overall pay structures and recapturing payouts that go against taxpayers' interests.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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