Wall Street Pay Cuts Stoke Debate About Washington’s Reach

Oct. 22 (Bloomberg) -- The Obama administration slammed Wall Street by ordering pay cuts of an average of 50 percent and caps on benefits for top executives at companies owing the government billions of dollars from taxpayer-funded bailouts.

The news triggered debate about the government’s reach into private industry, whether pay reductions would spread to other companies and if a talent drain from U.S. firms would ensue. Others cheered the move.

“I don’t think there will be any charity cases on Wall Street,” said Representative Barney Frank, 69, a Democrat from Massachusetts and chairman of the House Financial Services Committee in a telephone interview. “This is a very good thing.”

Executives at seven companies including New York-based Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp. will have their pay cut by an average of 50 percent after months of negotiations with Kenneth R. Feinberg, 63, the U.S. special master on compensation, according to people familiar with the matter.

The cash portion of salaries for the 25 highest-paid employees will be slashed 90 percent under Feinberg’s review, which will be released as early as today, according to one person familiar with the talks. Some cash will be replaced by shares that employees will be restricted from selling immediately, another person said.

‘Slam Dunk’

The administration, mindful of popular anger over Wall Street bonuses and risk taking that sparked the worst financial crisis in seven decades, responded favorably to Feinberg’s work. “The president put Ken Feinberg in place in order to be an advocate for taxpayers and it appears that Feinberg is doing what the president put him in place to do,” said Bill Burton, a White House spokesman.

Some compensation experts said that the moves would drive talent out of U.S. financial institutions when their expertise was most needed.

“The government is acting like the owner they are, and they’re a pretty ticked-off owner,” said Steven Hall, managing director of New York-based compensation consultant Steven Hall & Partners LLC. “The fear is, will this make people throw up their hands and say, ‘I have to leave’?”

Politicians disagreed. “It’s about time that somebody stands up to these folks we bailed out,” Representative Elijah Cummings, a Maryland Democrat, said in a phone interview. “They seem to have forgotten that they would not have jobs in many instances if it were not for taxpayers.”

‘Political Pressure’

Feinberg, who was special master of the September 11th Victim Compensation Fund, was named to the Obama administration pay position in June following public outrage over reports in March that New York-based American International Group paid $165 million in bonuses to employees of the derivatives unit.

While some consultants who advise companies on pay issues said Feinberg was being too aggressive, political analysts and lawmakers said the administration’s efforts to curb pay are appropriate.

“I suspect that the government is responding to building political pressure because Wall Street has found its stride again,” said Jeff Davis, an analyst at FTN Equity Capital Markets. “Pay is going to be huge at previously TARPed institutions such as Goldman Sachs, Morgan Stanley, and JPMorgan.”

“They’re responding to a building political firestorm in Congress,” Davis said. “As much as the Street wrings its hands about the government setting things like pay, once you take the government’s money, you got into that bed.”

‘Poaching Attempts’

To be sure, the administration’s role in corporate governance could jeopardize the government’s own investments in these companies. Some analysts warned that top performers at firms like Citigroup, in which the U.S. has a 34 percent stake, could jump to competitors that don’t operate under the same restrictions.

With steep pay reductions, “we will be cutting off the taxpayer’s noses to spite their faces,” said Robert Profusek, a partner at Jones Day in New York. “This slash-and-burn approach is, in my view, incredibly short-sighted.”

‘Strong Position’

“They have taken a very strong position,” said Gerald Rosenfeld, deputy chairman of Rothschild Inc. and co-director of New York University’s Business and Law program. “There are going to be a lot of active poaching attempts, most likely by European banks. This certainly is going to be a problem for Citigroup and Bank of America.”

Stephen Cohen, Citigroup spokesman, declined to comment, as did Scott Silvestri, a spokesman for Bank of America. Citigroup shares closed unchanged at $4.42 in New York Stock Exchange trading. Bank of America closed down 2.9 percent at $16.51.

In addition to compensation at Citigroup, Bank of America and AIG, Feinberg is overseeing pay at Auburn Hills, Michigan- based Chrysler Group LLC, Chrysler Financial Corp., Detroit- based General Motors Co. and GMAC Inc.

The automakers might escape the same level of cuts, according to David Cole, chairman for the Center for Automotive Research, who noted that the auto executives are paid less than those of banks.

Feinberg’s review went beyond paychecks. Benefits such as limousine service and use of a company’s aircraft valued at more than $25,000 must be approved by him, the people said. Some companies, including AIG, have already exceeded that limit and will have to pay back the difference to the U.S. Treasury, according to one person familiar with the negotiations.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net ; Julianna Goldman in Washington at jgoldman6@bloomberg.net ; Robert Schmidt in Washington at rschmidt5@bloomberg.net .

Key senators may rebuff Obama on health care

By CHARLES BABINGTON, Associated Press

WASHINGTON – The Democrats' control of a hefty majority in the Senate — plus the House — would suggest that President Barack Obama is within reach of overhauling the nation's health care system this fall.
But the numbers mask a more complicated reality: Obama and Democratic leaders have modest leverage over several pivotal Senate Democrats who are more concerned about their next election or feel they have little to lose by opposing their party's hierarchy.
One is still smarting from being forced to abandon next year's election. Another had to leave the Democratic Party to stay in office. And some are from states that Obama lost badly last year.
These factors will limit the president's ability to play his strongest card — an appeal for party loyalty and Democratic achievement — in trying to muster the 60 votes his allies will need this fall to overcome a Republican filibuster in the 100-member Senate.
When lawmakers face a tough vote, their uppermost thought is "survival," said Alan Simpson, a Wyoming Republican who spent three terms in the Senate.
On a very few occasions, Simpson said, then-President George H.W. Bush asked him to cast a vote likely to cause him political problems back home. That was perhaps three times in 18 years, said Simpson, who held a GOP leadership post. "I swallowed hard and went over the cliff," he said.
But it's a sacrifice that presidents and party leaders should not count on, he said.
The Democratic leaders' limited leverage will complicate the push for allowing the government to sell insurance in competition with private companies. Some Senate Democrats who oppose the idea are from states that voted heavily against Obama last fall.
Democratic Sen. Blanche Lincoln faces a potentially tough re-election race next year in Arkansas, where Obama lost to Republican John McCain by 20 percentage points. She says she will base her health care votes on what is best for Arkansans.
Choice and competition among insurers are good, Lincoln said, but "I've ruled out a government-funded and a government-operated plan."
Sen. Mary Landrieu of Louisiana, where Obama lost by a similar margin, said she might be willing to let some states try "fallback or trigger" mechanisms that would create a public option if residents don't have enough insurance choices.
But she told reporters, "I'm not for a government-run, national, taxpayer-subsidized plan, and never will be."
Another Democratic senator, who also may prove wary of Obama's overtures, takes the opposite stand.
"I would not support a bill that does not have a public option," said Sen. Roland Burris, D-Ill. "That position will not change."
Burris' willingness to bend could prove crucial this fall if Obama and Senate Majority Leader Harry Reid, D-Nev., need every possible vote in crafting a compromise, such as a national public option that is triggered if certain insurance availability targets aren't met.
But Burris may be in no mood to play ball. Obama and other top Democrats sharply criticized his appointment to the Senate in December by an ethically tainted governor, Illinois' Rod Blagojevich, and they forced Burris to abandon hopes of winning election in 2010 by making it clear they would not back him.
In short, Burris, 72, has virtually nothing to lose by defying his party's leaders and voting as he pleases.
Sen. Joe Lieberman of Connecticut is another potentially crucial senator with tenuous ties to the Democratic Party's hierarchy. Rejected by Connecticut's Democratic voters in the 2006 primary, he kept his Senate seat by running as an independent. He now calls himself an Independent Democrat.
Lieberman has criticized the health care bill that emerged from the Senate Finance Committee, but it and other health bills are undergoing changes.
Another centrist Democrat whose vote is uncertain is Sen. Evan Bayh of Indiana, a political battleground state. "I want to know what works for families and small businesses," said Bayh, adding that he might back public insurance options run by states, not the federal government.
It's possible that Obama and party leaders eventually will ask Democrats such as Bayh, in the name of party loyalty, to vote to block a GOP filibuster of a health bill even if they plan to vote against the bill on final passage. The strategy might enable Democrats to muster the 60 votes needed on a crucial procedural question and then pass the bill with a simple majority.
Bayh said that if a party leader "is asking some of us to enable the passage of legislation that we think would be harmful to the people of our state, I don't think that's a fair thing to ask."
It's possible that centrist Democrats are holding out for favors from Obama and party leaders, such as pet projects for their states or help in their next campaign. Obama already has lavished special attention on some of them.
He invited Bayh to the White House last week for a chat about health care and the deficit. In an interview that led to good publicity back home, Bayh told Indiana reporters that the president "was asking for my leadership on both of those issues."