Plan Includes Steps to Rein in Executive Compensation for Entities Rescued by the Taxpayers
On Monday afternoon, the U.S. House of Representatives voted down the multi-billion dollar financial rescue plan (H.R. 3997), that the White House and Congressional leaders negotiated over the weekend. It was expected that the House would pass the plan on Monday, followed by the Senate on Wednesday. As of this writing, it is unclear what next steps lawmakers will take. House leaders of both parties supported the plan. They could hold a vote on a modified version of the bill in the hopes of picking up some supporters, as the vote was relatively close (205-228).
The plan the House rejected would allow for the Treasury Department to purchase bad debts or "toxic assets," particularly mortgage-backed securities, from the banks and other parties that currently hold them. The goal is to allow lenders to stay afloat and ensure that credit remains available -- which facilitates everything from home mortgages to loans for business. These assets could later be sold by the government when the market has stabilized. The end result for the taxpayers might be a profit or a loss, meaning that the long-term price is uncertain but will ultimately be less than the widely cited $700 billion figure.
Limits on Executive Compensation
As part of the plan, there would be limits placed on the compensation paid to top executives at the entities selling assets to the government. Currently, companies cannot deduct more than $1 million for compensation paid to an individual in a given year, but for entities participating in this program the limit would be lowered to $500,000. The current limit is often circumvented by companies that make "performance-based" payments and other types of payments, but some of these loopholes would be closed for companies participating in this program.
Severance packages (the often derided "golden parachutes") for executives departing from such an entity would be banned. For those entities whose assets are directly purchased by the government, this applies to any golden parachute payments and the entities would also have a "claw back" of any bonuses paid based on financial statements that later turn out to be incorrect. For those entities whose assets are obtained through an auction, the ban on golden parachutes would apply to any new agreements but not existing agreements.
These steps were considered reasonable by Democrats and even many Republicans who usually chafe at the idea of any government interference in how companies pay their employees. The difference between this situation and all the others is that the companies in question now are being propped up directly with taxpayer dollars, making any argument that the free market must be allowed to determine the optimal pay for executives sound ludicrous. Meanwhile, many lawmakers fear the fall-out from voters, whose basic sense of fairness might be offended by the idea that taxpayers are paying or partially paying compensation packages of millions of dollars for those managing the entities that seem responsible for much of the economic crisis.
Other Provisions Won by Congressional Leaders
Congressional leaders won several other concessions from the White House. Among them are the following:
First, several provisions are geared towards preventing a loss to taxpayers. The government would acquire warrants to obtain non-voting shares of stock of the entities whose assets are purchased, so that taxpayers can share in profits if they become profitable. If the deal results in a loss for the taxpayers after five years, the President must propose to Congress legislation to recoup the money from the financial sector. What shape this would take exactly is unclear, but House Speaker Nancy Pelosi and others had, over the weekend, discussed a fee on financial institutions after the five-year period.
Second, Congress will be able to conduct oversight and stop the flow of money to the program if necessary. Only $350 billion would be provided initially, and the rest would come in another installment in the future that Congress could block if they did not like how the program was being run. Congress would be able to exercise oversight by requiring accounting reports of the assets purchased, the formation of an oversight board, and the appointment of an inspector general for the program.
Third, for mortgages purchased by the Treasury, steps must be taken to prevent foreclosures by renegotiating monthly payments in cases when it will not cause too much loss to taxpayers, although what this means exactly is unclear. For mortgage-backed securities purchased by Treasury, the Treasury must lean on the servicers to do so. The Treasury can use loan guarantees, credit enhancements, and the Hope for Homeowners program for these purposes. Some advocates are displeased that another provision was not included which would allow judges in bankruptcy proceedings to alter the terms of mortgage loans.
The bailout represents a spectacular failure of free-market ideology, which has apparently caused many conservative lawmakers to oppose it. Some progressive lawmakers may have also been offended by the idea of using taxpayer money to pay for the mistakes of wealthy investors and banking industry executives. Members of the House had initially planned on adjourning on Monday, but it is unclear as of this writing whether that will happen.