President Barack Obama finally reacted to the news that Wall Street had paid itself $18 billion in bonuses after taking hundreds of billions in bailout funds. There’s a lot less to his new policy, however, than meets the eye. (Note: this might actually be a good thing, since government controls on compensation are probably a terrible idea.)
Here are your five takeaways.
- The strictest limits only apply to AIG, Bank of America and Citi. You read that right. Barack Obama made a major policy statement about three companies. The $500,000 limit on compensation will only apply to banks or financial companies that receive “exceptional assistance,” a strange new phrase that somehow doesn’t include taking billions of dollars from the TARP. Basically, you can’t trigger these limits until you have failed so badly that you need a special government program to bail you out specifically. So far that’s AIG, Citi and Bank of America.
- Everyone else just has to say what they are paying their executives. Yup. All the other banks receiving TARP funds can pay anyone as much as they want. They just have to disclose the payment to shareholders and offer shareholders a “say on pay” vote on proxy statements. This is a change to existing policy, which only requires disclosure and not a shareholder vote. The “say on pay” won’t do much to limit pay but may empower special interest groups over general shareholders.
- Pay limits only apply to “top executives.” The chief executive and about four other people with “chief” in their titles will fall under the new rules. But if you are, say, the head of Global Double Down Ultra Leveraged Mortgage Backed Securities Trading at Citi, where the strictest limits apply, you can still be paid 20 million bucks. That’s because this regulation is fighting the last war: battling against self-dealing executives rather than trying to restructure the way Wall Street rewards traders and bankers who put their entire firm at risk.
- Clawbacks for fraud but not for stupidity. Let’s say you put your firm into a huge trade, like buying a mortgage centered bank focused on southern California. You got a huge bonus for that. Probably tens of millions of dollars. A couple of years later, it turns out that buying that bank was the worst idea in human history and has bankrupted your company. Can they clawback your bonus? Not a chance. The clawbacks don’t apply to trades that go bad or were just plain dumb. Only real frauds, who lie on financial statements, will get their pay clawed back.
- Golden Parachute limitation means you should get paid up front. There are two rules on Golden Parachutes. If you run AIG, Citi or Bank of America, you can’t have a “get rich quick” exit plan at all. If you are one of the top 20 guys at those places or a top executive at anyone who got TARP, you can only get one year’s pay on exit. In short, make sure you get paid while running your trading desk or brokerage unit. Don’t count on those big retirement paydays anymore.
There are a bunch of other things in the new regs, including a silly point requiring board approval for a corporate jet, renovating your office and throwing parties. We’re still looking into the policy. But as far as we can tell, it’s far less intrusive than anyone expected.