Senate Bill Caps TARP Comp At $400,000!


Dearest TARP recipients…wait until you see what the Senate stuffed into the latest stimulus bill.

  • Total compensation for ALL executives at TARP banks can be limited to $400,000, INCLUDING stock-based compensation.
  • Congress can review 2008 bonuses.
  • Congress can force bonus clawbacks from individuals for 2008 if it deems the compensation excessive.  “Excessive” is defined as anything above $100,000!

You read that right.

Kenneth Landon of JP Morgan:

* Title VI – Executive Compensation, which is contained on
page 734 of the attached bill that was passed by the Senate, caps the
annual compensation of *all* those employed at TARP banks at the salary
paid to the President of the United States (i.e., $400,000).
This would
supersede the $500,000 cap imposed by President Obama. Plus, the cap
*includes* bonus payments.  Here are the relevant sections:

Section 6012 (page 740)
(a) IN GENERAL.-Notwithstanding any other provision of law or agreement
to the contrary, no person who is an officer, director, executive, or
other employee of a financial institution or other entity that receives
or has received funds under the Troubled Asset Relief Program (or
”TARP”), established under section 101 of the Emergency Economic
stabilisation Act of 2008, may receive annual compensation in excess of
the amount of compensation paid to the President of the United States.

SEC. 6014 (page 741)
As used in this subtitle, the term ”compensation” includes wages,
salary, deferred compensation, retirement contributions, options,
bonuses, property, and any other form of compensation or bonus that the
Secretary of the Treasury determines is appropriate.

But wait, there’s more:

Section 6002 states that TARP banks are prohibited from paying or
accruing any bonus to *at least* the 25 “most highly-compensated
employees, or such higher number as the [Treasury] Secretary may
determine.” This restriction remains in place until the bank pays back
the TARP money.  

Got that?  If Congress decides that, say, the 700 folks at Merrill paid $1+ million should be included under this bill, they’re all capped at $400,000, too.

Here is the relevant section:
Sec 6002 (pages 736-37)
A prohibition on such TARP recipient paying or accruing any bonus,
retention award, or incentive compensation during the period that the
obligation is outstanding to at least the 25 most highly compensated
employees, or such higher number as the Secretary may determine is in
the public interest with respect to any TARP recipient.

Board-level control of compensation:

* The bill requires the establishment of a “Board Compensation
Committee” for each bank that is composed entirely of outside directors.
The Boards will review the compensation policies of their respective
banks. This further opens the door to direct government control of all
compensation policies of each TARP bank.  
Here is the relevant section:
Sec 6002 (page 737)
A requirement for the establishment of a Board Compensation Committee
that meets the requirements of section 6003.

Sec 6003 (pages 737-38)
ESTABLISHMENT OF BOARD REQUIRED.-Each TARP recipient shall establish a
Board Compensation Committee, comprised entirely of independent
directors, for the purpose of reviewing employee compensation plans.

The Board Compensation Committee of each TARP recipient shall meet at
least semiannually to discuss and evaluate employee compensation plans
in light of an assessment of any risk posed to the TARP recipient from
such plans.


* The Senate bill provides for a “claw-back” of “excessive” bonuses paid
to employees for work done during 2008 (i.e., the most recent payment of
bonuses).  The bill defines “excessive” bonus as any amount paid above
$100,000, not including stock awards.  
When “excessive” bonuses are
determined to have been paid, the US Treasury is authorised to seek
“reimbursement” from both the TARP bank *and* the individual employee.

Here is the relevant section:
Sec 6006 (pages 739-40)
IN GENERAL.-The Secretary shall review bonuses, retention awards, and
other compensation paid to employees of each entity receiving TARP
assistance before the date of enactment of this Act to determine whether
any such payments were excessive, inconsistent with the purposes of this
Act or the TARP, or otherwise contrary to the public interest.

NEGOTIATIONS FOR REIMBURSEMENT.-If the Secretary makes a determination
described in subsection (a),  the Secretary shall seek to negotiate with
the TARP recipient and the subject employee for appropriate
reimbursements to the Federal Government with respect to compensation or

* Speaking of “reimbursement” of “excessive” bonuses, the Senate bill
requires that the TARP bank redeem the government’s preferred shares to
the extent that such bonuses were paid (e.g., if a bank is determined to
have paid $1 billion in “excess” bonuses, then the bank would have to
redeem $1 billion in preferred shares).  What if the bank does not have
the capital to redeem the shares?  Then they are taxed at a rate of 35%
for the total amount of “excess” bonuses.  This provision will put
additional pressure on the capital structure of TARP recipients. This
provision does *not* apply to payments made in stock of the institution.

Here is the relevant section:
Section 6021 (pages 741-42)
IN GENERAL.-If, before the date of enactment of this Act, the preferred
stock of a financial institution was purchased by the Government using
funds provided under the Troubled Asset Relief Program established
pursuant to the Emergency Economic stabilisation Act of 2008, then,
notwithstanding any otherwise applicable restriction on the
redeemability of such preferred stock, such financial institution shall
redeem an amount of such preferred stock equal to the aggregate amount
of all excessive bonuses paid or payable to all covered individuals.

IN GENERAL.-The term ”excessive bonus” means the portion of the
applicable bonus payments made to a covered individual in excess of

COVERED INDIVIDUAL.-The term ”covered individual” means, with respect
to any financial institution, any director or officer or other employee
of such financial institution or of any member of a controlled group of
corporations (within the meaning of section 52(a) of the Internal
Revenue Code of 1986) that includes such financial institution.

AMOUNT OF TAX.-The amount of the tax imposed by subsection (a) shall be
equal to 35 per cent of the amount which the financial institution failed
to redeem within the time prescribed under 1903(b) of the American
Recovery and Reinvestment Tax Act of 2009.


* Obviously, the so-called “stimulus” bill contains many provisions
other than spending that will have a major impact upon the economy and
the financial system.  If the above provisions covering compensation is
included in the final bill, then it is obvious that the U.S. government
will take an overtly punitive stance against all those working in the
financial system. The contradiction, in my opinion, is that the
government is supposedly trying to support the banking system, but they
are punishing both shareholders and employees of those very same banks.
Investors likely will assess these latest restrictions as damaging for
rates of return on capital in the U.S. financial system, which would
further undermine the capital position of banks and other institutions.