Exec pay cap = Sen. Dodd job protection?

(This posting has changed from the original version.)

by Frank James

You don't have to be a Wall Street money magnet to be concerned about the unintended consequences from a provision tucked into the $787 billion economic stimulus bill that would limit executive pay.

Reports for a few days have said Sen. Chris Dodd placed in the legislation limits on bonuses and other compensation for senior executives whose companies receive federal money.

The New York Times has a report with a good description of the limits.

The pay restrictions resemble those that the Treasury Department announced this month, but are likely to ensnare more executives at many more companies and also to cut more deeply into the bonuses that often account for the bulk of annual pay.

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full...

... The revised rules do not impose a formal cap on executive compensation, unlike the Treasury proposal. Under that plan, banks were barred from paying more than $500,000 in salary until they repaid the TARP funds to the government. (Banks were permitted to offer bonuses in restricted stock.) Senator Dodd's rules, however, go a step further, prohibiting banks from awarding restricted stock to 25 top executives equal to more than one-third of their annual cash compensation until the banks have repaid all the money owed.

In addition, the Congressional rules would affect not just a bank's top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.

As sources quoted by the NYT and others say, one unintended consequence is that financial institutions will just raise salaries to offset the limits on bonuses.

Another is the risk of a brain drain at the very time when the financial industry and the economy can least afford it.

Yet another possibility is that financial institutions will repay the federal money they received sooner than they would have otherwise to get out from under the restrictions.

There's a requirement in the Troubled Asset Relief Program that if a bank repays the government it must then raise replacement capital in the private markets. Banks may just decide to go that route at greater expense and risk to themselves.

Then there's always the chance that banks that could use the cash to strengthen their balance sheets will forgo it altogether or wait until they are forced by federal regulators to take federal money.

Fearing any and all of these possibilities, the Obama Administration opposed Dodd's limits. Yet Dodd insisted on them.

Why, especially since so many of the bankers who will be affected are his wealthiest constituents living in Greenwich, Conn.?

Perhaps he's really angry at Wall Street types and wants to crack down on them. even though many are presumably his friends.

Here's another possibility worth considering. Though there are a lot of wealthy Wall Streeters in Connecticut, there are a lot more middle-class people there. And Dodd needs those middle-class votes next year in what could be a very challenging re-election bid.

Part of what makes it so difficult is Dodd, Senate Banking Committee chairman, was a "friend of Angelo" as in Angelo Mozilo, the former CEO of Countrywide. As such Dodd was on a VIP list at Countrywide for special loan handling.

Dodd has said he received no favorable interest rates and that he was unaware that he was on a "friend of Angelo" list. He has said he was never a friend of Mozilo's. At a recent press conference, he said:

First, Jackie and I acted properly in our mortgage refinancing negotiations. We did not seek or expect any special rates or terms on our loans and we never received any.

Second, the rates and terms we did negotiate were widely available in the market when we refinanced...

Dodd and his wife produced documents to support their position that they didn't receive special treatment.

Dodd also categorically denied any friendship with Mozilo:

... Let me be very clear, we are not friends of Angelo Mozilo and we have never been a friend of his. We have never communicated with him or anyone else other than loan officers at Countrywide about our mortgages. The first we ever heard of the "friends of Angelo" list was through press reports last summer. Apparently, Countrywide put us on this list, but it was without our knowledge or consent and as you'll see we negotiated market rates and terms.

Still, for some voters, Dodd's presence on Countrywide's internal "friends of Angelo's" list has made the senator seem less a friend of the people. Quinnipiac University has a recent poll that suggested that Dodd could be vulnerable in part because of the Countrywide controversy.

As CNN reported:

Fifty-one percent of registered voters in Connecticut questioned in a Quinnipiac University survey released Tuesday say they definitely won't or probably won't vote for Dodd in November 2010, when the five-term Democratic senator is up for re-election. Forty-two percent say they'll definitely or probably vote for Dodd.

Dodd is chairman of the Senate Banking Committee, which has oversight over the banking industry and mortgages. Dodd's two mortgages through Countrywide Financial Corporation's VIP program are being investigated by a Senate ethics panel. The senator said he sought no special treatment from Countrywide when he refinanced his Washington, DC and Connecticut homes six years ago. He acknowledged participating in the VIP program, but Dodd said he thought the program gave upgraded customer service rather than reduced rates.

The Dodd provision in the stimulus legislation will certainly give Dodd a way to change the subject when Republicans hit him with the "friend of Mozilo" charge when his re-election campaign gets into high gear next year.