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Bailout's limits on exec pay: Less than meets the eye

September 29, 2008 |  1:30 am

The financial-system bailout plan is supposed to limit the compensation of executives whose companies decide to sell mortgage junk to the government.

But the rules governing the pay restrictions are, in classic federal fashion, convoluted, as my colleague Jim Puzzanghera reports here.

Case in point: If a bank sells bad assets to the Treasury via an auction, and the bank ends up putting more than $300 million to the government over time, the bill says the Treasury secretary "shall prohibit, for such financial institution, any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency or receivership."

But as it reads, that's a restriction only on new employment contracts. Any golden parachute agreements already in place will stay in place for executives of banks that participate in auctions of bad assets.

And we can only imagine how the compensation consulting firms will go to work in the next few months, figuring how to structure pay packages so that financial-company CEOs don't lose in any case.

What about getting back some of the massive sums that were previously paid to Wall Street executives who oversaw the boom in now-rotten mortgage-backed securities?

That would be up to the Securities and Exchange Commission. Under the Sarbanes Oxley corporate reform law of 2002 the SEC can seek a "clawback" of certain compensation of a chief executive or chief financial officer -- if their company’s financial results turn out to have been misstated because of "misconduct."

It's a high bar to prove misconduct. But the SEC certainly has an incentive to look more closely at the earnings the investment banks booked as they hawked mortgage dreck to investors worldwide.

Bloomberg News did some interesting calculations of what was earned on Wall Street in the boom years:

Wall Street's five biggest firms paid more than $3 billion in the last five years to their top executives, while they presided over the packaging and sale of loans that helped bring down the investment-banking system. . . . "Shareholders and boards should have done something about this a long time ago,'' said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "They justified these levels of pay on the idea that they're all geniuses. I think that balloon has burst."

And what a mess it left.