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Tangled Tales From TARP - 'How Dare You Limit My Pay'

Guest post from the Finance Addict - An opinionated ex-banker who follows the global economy and keeps a critical eye on the so-called Masters of the Universe.


On February 4, 2009 President Obama stood in the Grand Foyer of the White House and, facing the usual battery of press and camera flashes, said the following:

[I]n order to restore our financial system, we’ve got to restore trust. And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.

Preceding him was Treasury Secretary Timothy Geithner who said:

Current programs providing exceptional assistance to financial institutions forbid recipients of government funds from taking a tax deduction for senior executive compensation above $500,000. Today’s guidance takes this restriction further by limiting the total amount of compensation to no more than $500,000 for these senior executives except for restricted stock awards.

Less than two weeks later, and with much fanfare, President Obama signed the American Recovery and Reinvestment of 2009 into law. The most important goal of this act was to juice the economy with fiscal stimulus. But it also amended President Bush’s Emergency Economic Stabilization Act of 2008 by adding specific language on executive compensation for TARP recipients. The ARA ordered that the Treasury “Secretary shall require each TARP recipient to meet appropriate standards for executive compensation and corporate governance.”

Now the Treasury didn’t get around to doing this right away. It was kind of busy keeping the world’s financial system from curling up into the fetal position. But by June of that year the new Interim Final Rule on TARP Standards for Compensation and Corporate Governance were ready. And here’s what Geithner said when he announced them to the world. The emphasis is mine.

I want to be clear on what we are not doing. We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.

So just to recap: over the course of four months and with the big stinking pile of TARP still burning into our public consciousness, Secretary Tim Geithner went from “limiting the total amount of compensation to no more than $500,000 for these senior executives” to “not capping pay” because it might be “counterproductive”.

What happened? Geithner & co. had plenty of time to think about their stance over those intervening four months. This was urgent, and yet not a “fix-this-tomorrow-or-the-world-goes-KABOOM! kind of urgent. Presumably they had a lot of meetings, canvassed a lot of opinions, checked in with El Presidente on the topic every now and again, and then sat down and decided on an approach that would “not set forth precise prescriptions.” Mind = blown.

Now the one concrete step they did take was to appoint Kenneth Feinberg as “Special Master” for TARP Executive Compensation. Feinberg seems to be the legal version of a poet laureate. In the late 90s he helped determine the fair market value of the most complete film of John F. Kennedy’s assassination. He was called on to head of the 9/11 Victim’s Compensation Fund, doing so to mixed reviews. After TARP he went on to become the head of the Gulf Coast Claims Facility, the compensation fund established in the wake of the BP oil spill. (Paid by BP, he has never quite shaken allegations of an inherent bias in the oil company’s favor.) This much is clear: he’s been around the block a few times.

So, is he the one to blame for the conclusions reached in this week’s report from the Special Inspector General of TARP (SIGTARP)?

Although generally he limited cash compensation and made some reductions in pay, the Special Master still approved total compensation packages in the millions.


The Special Master consistently approved cash salaries in excess of $500,000 for the CEO of each company who asked, with the exception of Bank of America’s CEO, who had announced his retirement.

Kinda makes Feinberg sound like a wet-behind-the-ears, coffee-fetching, photocopy-making intern with a serious lumbar deficiency, don’t it?

SIGTARP found that the Special Master was inconsistent in applying OSM’s [the Office of the Special Master for TARP Executive Compensation] prescription to limit cash salaries to $500,000 except for “good cause” shown. OSM lacked documentation supporting why it provided employees cash salaries of more than $500,000.

But this is actually not, as it would seem, a case of a legal laureate gone rogue. Here’s what happened.

Feinberg took a lot of heat from the 7 companies he was overseeing. (Remember — these stricter guidelines on pay were only relevant to the 7 companies that received “exceptional assistance”: AIG, Bank of America, Citigroup, Chrysler Financial, Chrysler, GM and Ally, the former GMAC. They still apply to the 3 who have yet to repay: AIG, GM and Ally.) However, he also faced serious pressure from his own colleagues at the Treasury, some of whom took it upon themselves to intervene directly, especially with respect to AIG. Witness:

SIGTARP found that [Jim] Millstein, [Treasury’s then-head of restructuring for AIG], intervened in the Special Master’s process to set the pay package for AIG CFO David Herzog. Millstein told SIGTARP that his primary focus was to “keep AIG together.” Millstein told SIGTARP that he [Millstein] was a facilitator/mediator between AIG and the Special Master. He weighed in on OSM’s 2009 pay determination for AIG CFO Herzog, telling the Special Master that if AIG did not retain its CFO, it risked a credit rating
downgrade. He advised the Special Master that AIG needed to keep Herzog by possibly adding a little more cash, and a little more total compensation. In response, Millstein said, the Special Master gave some concession to AIG’s request for additional compensation, and the CFO remained at AIG.

SIGTARP found that then-Assistant Treasury Secretary [Herbert] Allison’s communication with AIG officials over compensation was quite significant and starkly contrasted with almost no involvement in compensation with the other six companies. Allison had weekly telephone conversations with AIG CEO Benmosche and AIG’s then Chairman of the Board during the height of [Feinberg’s] 2009 determination process. Allison told SIGTARP that there were times when he was contacted by AIG top management who told him they were concerned that the Special Master’s decisions would cause great reactions in keeping people.

In helping to determine AIG’s stock-based compensation, Millstein even went so far as to develop

a new “phantom stock” that did not exist, was independent of AIG’s balance sheet, and the value of which was based on the book value of four AIG subsidiaries. Millstein helped create this phantom stock (also called a basket stock), even though AIG’s common stock was trading on the market at an adjusted price of $20.42 per share on August 14, 2009, the same day that AIG submitted its proposal to OSM to receive immediately sellable common stock.

As you can see, a great deal of the pressure to undermine these pay restrictions came from Treasury, itself.

Now the justification that we hear over and over again is, “Well, we need to pay competitively in order to retain key people and help get the taxpayer’s money back.” This is a perfectly legitimate aim, and in October 2010 Feinberg testified before the Congressional Oversight Panel that this is exactly the message he got — from Geithner, from the Obama Administration and from Congress, itself.

To be fair, Feinberg is not above reproach. His office apparently did not do a very good job in documenting all aspects and steps of how they reached their pay decisions. But it total it really does seem like he was marching to the government’s tune.

But here’s the thing. AIG, the company to which Feinberg was most pressed to be generous, despite AIG Financial Products’ unique role in causing the crisis, has still not fully repaid the taxpayers’ money! Taxpayers still own 77% of the company and are owed $51.1 billion. This is the largest remaining amount of the 7 that received the exceptional assistance. Another report from SIGTARP published yesterday says that “even though Treasury and CBO estimate a loss on these investments, we may not know for some time how much of a loss taxpayers will ultimately take.

On the other hand Citigroup and BofA, who enjoyed less favorable treatment, were among the first to repay! Feinberg’s staff told SIGTARP that certain unnamed companies (ahem, AIG) very hesitant to pay long-term restricted stock because there was no certainty that said companies “would ever be free of TARP”. 

Looks like Feinberg didn’t have to worry that “if we didn’t provide competitive pay packages, those top officials would leave and go elsewhere…they might even go to China.” We have state capitalism right here in our own backyard!


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About the Author, 

I confess: I'm a Finance Addict. An opinionated ex-banker who follows the global economy and keeps a critical eye on the so-called Masters of the Universe. 




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Reader Comments (5)

Great work, finance addict. Thanks for sending it my way.
Jan 27, 2012 at 12:11 PM | Registered CommenterDailyBail

A Short List Of People Who Could Replace Treasury Secretary Geithner In A 2nd Obama Term
Jan 27, 2012 at 12:16 PM | Registered CommenterDailyBail
I read the TARP piece DB posted a while back from Finance Addict. As with this one, great stuff.

BTW, is there a way to access the archived posts on Finance Addict?
Jan 29, 2012 at 2:16 PM | Unregistered CommenterPitchfork

I'm not sure. I've never really kicked around the site.
Jan 31, 2012 at 2:04 PM | Registered CommenterDailyBail

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