Grassley Says Executive Pay Limits Undermined by Bailout Shift

By Ryan J. Donmoyer and Robert Schmidt

Nov. 14 (Bloomberg) -- A Republican senator said Treasury Secretary Henry Paulson's change in course on a $700 billion bailout of the U.S. financial industry will undermine restrictions on executive pay at companies receiving federal aid.

Iowa Senator Charles Grassley, the top Republican on the Senate Finance Committee, said tax penalties on golden parachute severances and pay exceeding $500,000 for companies' top five officers aren't enforceable under Paulson's strategy of buying stakes in banks.

``It would appear that no penalties will apply to institutions that receive taxpayer funds and violate the act's restrictions on executive compensation,'' Grassley said in a letter to Paulson released by the senator's office.

Paulson's original plan was to buy troubled mortgage assets from financial institutions. Yesterday he announced he would use the second half of the rescue program to help relieve pressure on consumer credit.

Congress relied on tax penalties in the rescue plan to give weight to executive pay limitations. Those restrictions fell short of what lawmakers including Montana Democratic Senator Max Baucus, the Finance Committee chairman, said they wanted.

Tax Penalties

The penalties, applying to companies that sell at least $300 million in troubled assets to the Treasury Department, would deny corporate tax deductions for pay in excess of $500,000 to the chief executive, chief financial officer and the next three highest-ranking executives. Also, a 20 percent surtax would be imposed on senior officials who receive large severances.

There are no restrictions on payments to officials beyond the top five officers.

The Treasury Department, in an Oct. 14 notice, said all financial companies getting federal aid must submit to restrictions on executive pay that go beyond what Congress passed.

``Companies participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under this program,'' the Oct. 14 notice said.

Even so, Grassley said the Treasury Department would have little recourse if companies violated the agreement.

``Treasury is not constrained by the act and should be exercising its broad authority to issue regulations that further limit executive compensation and other expenses paid by institutions that are receiving funds under the act,'' Grassley said.

All But $60 Billion

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers, including General Motors Corp.

Democrats in Congress demanded pay curbs in the rescue legislation after learning that executives at firms that already got federal aid, such as Fannie Mae and Freddie Mac, were set to pocket millions of dollars. Their regulator on Sept. 15 blocked $24 million in such payments to the companies' officers.

Andrew DeSouza, a Treasury Department spokesman, said the department was still reviewing Grassley's letter and had no immediate comment.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net