Watchdog: Administration’s Efforts to Restrict Executive Pay at Bailed-Out Firms Failed

By Matt Cover | January 24, 2012 | 5:07 PM EST

Troubled Asset Relief Program (TARP) special inspector general Christy Romero. (Photo: SIGTARP)

( – An odd-couple partnership of industry and government officials has largely stymied the Obama administration’s efforts to restrict significantly the pay of top executives at firms bailed out under the Troubled Asset Relief Program (TARP), a watchdog has found.

In a report released Tuesday, TARP special inspector general (SIGTARP) Christy Romero examined efforts by the program’s “Special Master for Executive Compensation” – a post established in the U.S. Treasury Department – to curb salary and bonus payments of the top 25 executives at the most heavily-bailed out firms from 2009 to 2011.

“SIGTARP found that the Special Master could not effectively rein in excessive compensation at the seven companies,” the report concluded, “because he was under the constraint that his most important goal was to get the companies to repay TARP.”

In 2009, after it was revealed that AIG had paid its top executives hundreds of millions in salaries and bonuses, President Obama called on Congress to limit salaries at bailed-out firms to $500,000 and to force those companies to make bonus and dividend payments in long-term stock options.

Romero’s report found that officials from the seven firms subject as well as Treasury Department officials pressured then-Special Master Kenneth Feinberg to ignore the pay restrictions set by Congress and the president.

The seven firms were AIG, Bank of America, Citigroup, General Motors, Chrysler, Chrysler Financial and Ally Financial.

“Special Master Feinberg said that the companies pressured him to let the companies pay executives enough to keep them from quitting, and that Treasury officials pressured him to let the companies pay executives enough to keep the companies competitive and on track to repay TARP funds,” Romero reported.

In other words, both the bailed-out firms and Treasury worked to undermine the administration’s goal of limiting cash salaries to $500,000 and of ensuring that bonuses and other compensation be given only in the form of long-term stock options – a measure aimed at making executives more invested in the success of their companies.

Both Treasury and bank officials argued that limiting pay could endanger the bailed-out firms, telling Feinberg that if they weren’t allowed to make more money, the firms could collapse and the government would never get its bailout money back.

AIG president and CEO Robert Benmosche (AP Photo)

“[T]he seven companies had significant leverage over OSM [Office of the Special Master] by proposing and negotiating for excessive pay packages based on historical pay, warning Special Master Feinberg that if he didn’t provide competitive pay packages, top officials would leave and go elsewhere,” the report stated.

It said Treasury officials had pressured Feinberg mostly on behalf of insurance giant AIG – apparently at the behest of AIG CEO Robert Benmosche – defending it from the Special Master’s efforts to rein in executive pay.

“Although Treasury officials were involved to protect taxpayers’ investment in AIG, AIG stood out as the only one of the seven companies in which senior Treasury officials intervened in OSM’s process,” Romero said.

“It appeared to be due to the sheer size of the Government’s investment and requests by AIG’s CEO that the officials intervened,” she added.

The report also found that the executive pay limitation plan would most likely not hold in the long-term. Rather than setting a standard as Obama had outlined, Feinberg told Romero that he did not expect any of the seven most bailed-out firms to continue to limit executive pay once all had paid back their TARP funds.

“Despite once hoping to change the compensation regime at the seven companies and have his determinations serve as a useful model for other companies, Feinberg told SIGTARP that he did not expect that the seven companies would adopt elements of OSM’s compensation determinations when they are no longer under TARP.”

Currently, only AIG, GM and Ally remain under TARP, owing the government a total of $87 billion.

The SIGTARP report can be found here. (PDF, 2.73 MB)