Bush Administration created executive pay loophole
The Bush Administration inserted an eleventh-hour provision into the $750 billion bailout bill to protect executive bonuses, a single sentence that will torpedo efforts to reduce bonuses even as companies slash tens of thousands of jobs and use taxpayer money to gobble up other companies at fire-sale prices.
Pressured by constituents who worried that companies would take government aid and continue to pay their executives eye-popping bonuses, Congress inserted a provision that would penalize companies who took taxpayer money and shelled out outsized bonuses.
But at the last minute, Bush officials insisted on a one-sentence provision that stopped the measure in its tracks, according to congressional aides who spoke to the Washington Post.
The change stipulated that the sanction would only apply to firms that sold mortgage backed securities to the government at auction, which the Bush Treasury Department said would be the method they'd use to infuse troubled companies with bailout cash.
"Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts" who spoke to Post reporter Amit Paley. "In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives."
"The flimsy executive-compensation restrictions in the original bill are now all but gone," Sen. Charles Grassley, a Republican from Iowa and ranking member of the Senate Finance Committee, told Paley.
According to Paley, "The final legislation contained unprecedented restrictions on executive compensation for firms accepting money from the bailout fund. The rules limited incentives that encourage top executives to take excessive risks, provided for the recovery of bonuses based on earnings that never materialize and prohibited 'golden parachute' severance pay. But several analysts said that perhaps the most effective provision was the ban on companies deducting more than $500,000 a year from their taxable income for compensation paid to their top five executives."
This amendment to the Internal Revenue Code was the only part of the bailout measure that had an explicit enforcement mechanism.
Bush officials initially opposed executive compensation rules. Banks, in particular, had been taking heat for "golden parachute" cases, where top executives received lavish pay upon their departure even if they'd done a poor job leading their company.
It remains unclear whether the Administration ever intended to limit executive pay -- if perhaps they knew in advance that Treasury didn't intend to buy mortgage assets at auction all along -- as they'd told Congress.