Still-fuzzy rules dog Geithner’s toxic-asset purchase plan
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The Treasury can’t seem to unequivocally guarantee major investment firms that they won’t be subject to executive-pay limitations if they partner with the government to buy banks’ toxic assets.
That could be a deal-killer, because it’s inconceivable that giants such as Pimco and TCW Group in Southern California, and BlackRock Inc. in New York, would agree to pay cuts to participate in the program.
The public-private investment plan, unveiled in March, calls for big money managers to invest alongside the government to buy banks’ troubled assets, such as mortgage-backed securities. Treasury Secretary Timothy F. Geithner envisions these partnerships buying up to $1 trillion of toxic debt to unburden banks.
But unlike the government’s injections of capital into major banks, which were mandatory for the banks and came with strings attached (such as pay restrictions), money managers’ participation in the public-private investment plan would be voluntary.
So how could the government tell the firms that they’d have to limit employees’ pay, and still expect them to join in? It wouldn’t work, Geithner acknowledged last month, when he told reporters that federal compensation rules ‘will not apply to the asset managers and investors in the program.’
But a report Tuesday from the inspector general of the government’s financial-system rescue said Treasury officials have raised the possibility of pay restrictions on fund managers, depending on their participation in rescue programs other than the public-private investment plan. (See p. 110 of the 250-page report, fyi.)
The issue also came up during Geithner’s testimony before the Congressional Oversight Panel on Tuesday.
From the transcript, here is an exchange between panel member John Sununu and Geithner:
Sununu: ‘Well, let’s try to clarify, because there are members of Congress now talking about applying the executive compensation limits to the public-private investment partnerships. ‘This is an issue of changing the rules after the fact or changing the rules in a way that would discourage participation. What is the administration and the Treasury Department’s position on applying rules for compensation or other rules to the public-private investment partnerships?’ Geithner: ‘We’re in the process now of completing a draft of a rule for applying those conditions. We’re going to apply the law. We’re going to put out in the public domain, for comments, a draft rule.’ Sununu: ‘So there will be a rule forthcoming. And what’s the Treasury’s position on application, of the executive compensation limits that are in law today, to those partnerships?’ Geithner: ‘Well, you’ll see in the rule how we propose to strike that balance. But it’s my judgment that those compensation restrictions do not need to apply to the programs you refer to.’
The application deadline for money managers to join the public-private investment plan is Friday. Yet Treasury is still in the process of formulating a rule on the issue of pay restrictions.
Geithner says it’s his ‘judgment’ that the limits ‘do not need to apply’ to the public-private investment plan. But that’s a lot different from telling potential applicants unequivocally that they have no reason to fear that the rules will change after the game begins.
-- Tom Petruno