- The Washington Times - Thursday, September 25, 2008

Treasury Secretary Henry M. Paulson Jr. Wednesday agreed to congressional demands to limit the pay of bank executives in one of his biggest concessions to date to try to secure quick passage of a $700 billion bank bailout.

The Treasury gave ground on the politically potent executive pay issue after Republicans and Democrats questioned why taxpayers should pay for multimillion-dollar “golden parachutes” and other perks for executives who got their banks into trouble with toxic mortgages.

“The American people are angry about executive compensation and rightfully so,” Mr. Paulson told the House Financial Services Committee Wednesday.

“Many of you cite this as a serious problem, and I agree. We must find a way to address this in the legislation, but without undermining the effectiveness of this program.”

The remarkable shift showed how increasingly desperate the administration has become to get a bill — not only reversing its previous stand that penalties on executives would make the bailout program less effective by making banks less willing to participate, but also reversing long-held ideological views against government meddling in private corporate matters.

But in eleventh-hour negotiations over the bailout that looked increasingly in danger of faltering, the administration continued to hold fast against a proposal from congressional Democrats to give taxpayers an equity stake in banks that seek aid.

Treasury has been even more adamantly opposed to that proposal, saying it would undermine the bailout program as well as the nation’s free-market economic system.

Many economists agree with the administration on the need to avoid too much meddling in the private banking system.

“It´s imperative that lawmakers not interfere too much with the free-market system that America was built on,” even though lawmakers are being forced by circumstances to act on a highly unpopular bailout, said Anthony Sanders, professor at the W.P. Carey School of Business at Arizona State University.

“Congress needs to learn from this situation and start better oversight of Wall Street,” he said. “Even in a football game, we have referees to determine what´s fair, but not to determine the outcome of the game. Regulation shouldbe used … to protect the free market.”

Graef Crystal, an analyst who writes a newsletter on executive compensation, said he is “philosophically opposed to both the government bailout of banks and the imposition of executive pay controls.”

“I’ve been on the scene a long time, and I am here to tell you that clumsy attempts by Congress and the bureaucrats to rein in executive pay have for the most part aggravated the problem, not lessened it,” he said.

President Clinton’s attempt to limit executive pay to $1 million in 1993 backfired and helped produce the astronomical compensation that executives enjoy today, he said, by limiting only executives’ yearly salary — not compensation that is deferred until after retirement or comes in the form of stock options and grants.

The result was an “explosion” of stock-related compensation that now dwarfs a typical executive’s nominal salary and has greatly widened the gap between executive pay and ordinary workers, he said.

Mr. Crystal noted that Mr. Paulson naturally opposed pay limits demanded by Congress because he was among the most highly paid executives in the nation when he headed Goldman Sachs Group Inc. before joining Treasury, earning on average $27 million a year.

But all the while he was chief executive, Goldman’s earnings beat the Standard & Poor’s 500 average earnings by 12.3 percentage points a year — a stellar performance, Mr. Crystal said.

“I have to put a clothespin on my nose when I stand too close to pay numbers this high,” he said. “But hey, if you believe in pay-for-performance as I do, and the CEO’s got the performance, well then you have to accept, if grudgingly, the results.”

Nevertheless, lawmakers vowed to heed their constituents’ wishes and include curbs on executive pay in the bailout bill.

Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate banking committee, told Mr. Paulson on Tuesday that he could “count on” compensation limits.

“There is absolutely zero public interest in giving a dime to the top executives at these institutions,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank.

“The top executives at these banks are among the richest people in the country. They are obviously incompetent, or their banks would not be sitting there with tens of billions of dollars of junk loans.”

Congress risks creating more crises in the future if it allows executives to profit from their misbehavior, Mr. Baker added.

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