The massive economic stimulus package President Obama was expected to sign Monday presents a mixed bag for the banking industry.
Even though executive compensation limitations at institutions that accepted government money under the Troubled Asset Relief Program were significantly watered down, and those banks gained the ability to repay the capital without penalty, banking industry representatives said Friday that the restrictions still went too far.
The compensation provisions were included in a $787 billion economic stimulus bill the House approved Friday by a vote of 246 to 183. The Senate voted 60 to 38 later in the day and the president is expected to quickly sign it into law.
The final compromise killed provisions added by the Senate that would have clawed back any bonus in excess of $100,000 paid to executives at companies that received Tarp capital injections. The provisions also would have capped total annual compensation at $400,000.
The Obama administration has said it would cap compensation at companies receiving future injections of Tarp capital at $500,000.
The remaining compensation limits bar senior executives and the next level of highest-paid employees from receiving bonuses or other incentives after Feb. 11 until the Tarp funds are repaid.
Bankers were given the right to repay Tarp money early without replacing the capital with private resources.
The incentive restrictions would still allow long-term restricted stock, so long as it did not make up more than a third of the executive's pay.
The Senate version would have shut off all bonuses and incentive compensation to the 25 highest-paid employees. The change was made so community banks could continue to pay bonuses to loan officers or tellers.
The ban on bonuses works on a sliding scale. The more Tarp money a company takes, the more employees must go without bonuses. At those getting up to $25 million, the five highest-paid employees are covered; at those receiving more than $500 million, the top five plus the next 20 highest-paid employees are covered.
Bank lobbyists said Friday that the provision could make the companies that took Tarp funds vulnerable to poaching by those that have not accepted government funds, including foreign banks.
The executive compensation provisions give the Treasury secretary broad discretion to expand the number of employees denied bonuses and to claw back any compensation already paid to Tarp recipients that was "contrary to the public interest" or based on inaccurate earnings.
Companies receiving Tarp funds would have to appoint an independent committee to ensure the compensation plan did not cause the company to take unnecessary and excessive risks. The compensation board would have to come up with policies for expenditures on luxury items like airplanes, parties, and other activities as laid out by the Treasury Department.
Shareholders would be given nonbinding votes on pay packages.
The Obama administration is expected to unveil a loan modification plan through Tarp soon that could include incentives like loan guarantees. To prevent the executive compensation standards from scaring away lenders, those that participate in modifications but did not receive Tarp capital would be exempted from compensation limitations.
Another penalty for those benefiting from Tarp or any of other form of federal assistance is a two-year prohibition on hiring foreign workers with H-1B visas.
Industry representatives said such a restriction would unfairly make it harder for bankers to hire the most qualified employees.
"It limits the ability of companies to hire specialized talent at a time when we need it most," said Scott Talbott, a senior vice president of government affairs for the Financial Services Roundtable.
Putting concerns over executive compensation aside, banking trade groups said Friday that the stimulus included some important measures to help the economy, including a focus on tax cuts and incentives for first time homebuyers.
"The fact that they are doing a stimulus is a good thing, and injecting this capital into the market is positive, because if people don't have jobs, they can't pay any of their bills, including their mortgage," said Francis Creighton, the head lobbyist for the Mortgage Bankers Association.
Mr. Creighton praised a provision that would reinstate last year's temporary increase in the conforming loan limits for Fannie Mae and Freddie Mac to $729,500. However, he said he wished the increase would have been made permanent. The higher limits are set to expire Dec. 31.
He also said a housing tax credit that was increased by $500, to $8,000, and made permanent would help first-time buyers purchase a home, but he said the credit should have been made available up front.
"It's an important move, because it's going to help stimulate demand for housing and reduce the cost," Mr. Creighton said. "They should have made it available to people at the closing table, though, because even today, while rates are so low, the problems people have in getting a home is they don't have strong enough credit, and they don't have a down payment. If this credit were available at the closing table, they would be able to get over one of those hurdles."
Mr. Creighton also said his group was disappointed that the final bill did not include improvements to make the Hope for Homeowners program simpler and less costly for lenders to participate.
The program is aimed at reducing foreclosures by letting servicers reduce borrowers' mortgage principal in exchange for a government guarantee. However, so far it has proven too costly and clunky to make much of a dent in the market.
