Feinberg rulings expected Friday: Bank of America paid-off money yesterday, Citi looking to pay-off today

It's kind of funny.

Just a quick note: Bank of America announced yesterday it had repaid the federal government the $45 billion in federal funds it received under the TARP program. The company sold stock to create the liquidity. From outgoing Ken Lewis, "We owe taxpayers our thanks."

The move will most definitely help the stalled BofA CEO search.

Politico reported this morning that Citi also intends to announce today it will repay the federal government. A similar equity sell is anticipated to repay the $20 billion in federal funds the company received.

In Feinberg we trust: will he blink in light of AIG threats?

It has been well-reported by various media that TARP Pay Czar Kenneth Feinberg may blink in light of five AIG employees threatening to walk if their pay is limited to $500,000 per year.

Let me say first that until Feinberg actually releases his rulings, and provides rationale for this alleged accommodation, I have hope in his discretion. He is, afterall, the person closest to the issues involved in the pay caps placed on companies who have not yet repaid their TARP funding. And truthfully, the law does allow Feinberg to award compensation above the $500,000 cap for “good cause.” Feinberg has already broken this cap in three instances for AIG employees: CEO Benmosche, CFO Herzog, and Property Casualty Chief Moor. Those rulings were released earlier this Fall when Feinberg considered the compensation of the top twenty-five highest paid employees at AIG. The allegation of accomodation now, however, focuses on Feinberg’s current consideration of the compensation for the next seventy-five highest paid employees at AIG.

The alleged accommodation strikes me as dangerous precedent for Feinberg’s office. Afterall, if one company is allowed to pay above the compensation limits in light of a threat to walk, then why not a second or third? What’s really intriguing to me is how well Feinberg has to date maintained cooperation from these companies regarding pay restrictions; a matter both highly sensitive and normally internal. One concern is that this alleged accommodation is the first kink in that cooperation, and consequently in Feinberg’s authority and the effectiveness of his office.

People “close to Feinberg” indicate the accommodation has nothing to do with the threat of employees walking. Other sources indicate two of the five AIG employees have since rescinded their threat to walk.

But the initial stonewall by the AIG employees does strike me as short-sighted. In light of the current economic turmoil and the real struggle that many middle and lower class Americans face, I am curious at what is the real drama behind accepting half a million dollars for a year’s work. Surely some compromise could have been reached regarding form of compensation, and perhaps deferred compensation. Presumably, these circumstances would exist only for a year or three? Though perhaps AIG does not have the ability to repay the federal funds in the next several years? AIG received a total of $183 billion dollars in federal funds. I don’t know, but again am very interested in Feinberg's rulings themselves (hopefully released later this month).

Outside of the scope of this post, but it would be interesting to compare and contrast the work responsibilities and value added of the five AIG employees threatening to walk, to that of Citi’s Andrew Hall. Recall, earlier this summer Citigroup actually spun-off part of its organization to accommodate an employee who had earned $100 million in bonus awards for the work performed. The move also accommodated the federal government and the TARP pay restrictions. Which factor in the TARP discussion has so-changed that we have gone from Citigroup’s handling of the matter, to AIG’s?

The story is everywhere, including Bloomberg and the WSJ. This blawg’s writing about Kenneth Feinberg is located here.

AIG Benmosche's Hissy Fit

I actually laughed at loud when I read this on my handheld last night. AIG CEO Benmosche (who will receive $7 million in pay for 2009) has threatened to leave his employment because the new Treasury restrictions on pay are just too difficult.

*giggle*

Is this for real? I mean, are you kidding me? Doesn't this bring up imagery of a small child throwing himself on the ground and screaming,"It's not fair!"? *laugh* And how does any executive think he's going to lateral into another company, "Hi, My name is Robert, and as long as the job is easy, I will fulfill my obligation to you." It has clearly been a long time since Benmosche has really had to struggle for a result; I wonder how he would fare in the current employment market as a young professional ...

Let's keep some key facts in mind:

• There is a formal process AIG can use to appeal Feinberg's decisions. AIG has not made use of this process yet.
• The recurrent argument of 'we're going to lose talent if we stick to these pay restrictions' hasn't come to fruition yet.
• AIG still has to pay the federal government back $90 billion from the Fall 2008 bailout. $90 billion; yeah: you're welcome.
• Benmosche has thrown tantrums before by threatening to step down, as recently as August before Feinberg approved Benmosche's own multi-million dollar pay.

My presumption has always been that people in his position (executives) are placed there in part for their unique and broad perspectives. That no matter the obstacle, their experience, calm, and expertise would prevail to find a suitable solution for the company. That is part of the argument advanced for enormous executive pay, correct?

Frankly, I am embarrassed for AIG and feel sorry for the PR people that have to spin this to the media. Shame on you Mr. Benmosche: you assumed the role of leader and are well-compensated for it; do your job. Every problem has a solution - it's just a matter of you finding it.

(And for the AIG people "familiar with the matter" who continue to talk to parties outside the company - learn some discretion).

Ken Lewis takes no salary or bonus for 2009!

No worries - Dude takes home over $100 million in a retirement package regardless (which conveniently for him, was arranged before BofA received federal monies and came under the supervision of Treasury's Special Master for TARP Executive Compensation, Kenneth Feinberg).

I posted earlier today about Feinberg and AIG, but Feinberg has struck again: he has knocked Lewis' $1.5 million base pay to zero - and Lewis has agreed. Lewis, in fact, will have to repay $1 million back to BofA for salary already received this year.

Hat-tip: WSJ.

Photo credit: Dealbreaker.

Compensation Czar Feinberg and Special Inspector General Barofsky Put the Screws to AIG

For purposes of clarity, know that Kenneth Feinberg is Treasury's Special Master for TARP Executive Compensation, as appointed by the Obama Administration. Allen has defined Feinberg's responsibilities here. Barofsky, on the other hand, is the Special Treasury Department Inspector General who oversees the whole of how TARP is administered.

It hit the news cycle across the board Tuesday that Feinberg, in reviewing AIG's compensation plans for close of 2009, has asked the company to reduce bonuses slated to be paid to it's trading unit (the unit largely creditted with AIG's less-than-stellar 2008 performance). Problem: those bonuses were promised and contracted for prior to AIG's receipt and engagement of TARP provisions (Fed and Treasury monies). Big threat on the table? Feinberg has threatened to reduce the pay of other executives if the bonuses of the trading unit are not reduced. How's that for compromise?

Relatedly, an audit of the of the $165 million paid out in retention bonuses in March (also contractually agreed to preceding the federal bailout) show that not only did the payments not work to keep everyone on staff, but some people who are not necessarily indispensable to AIG's business line received money ($7,700 for a kitchen assistant, $7,000 for a mailroom assistant, and $700 for a file administrator) (as a related aside: it will take me three months of full-time work as a young attorney to net $7,700).

Pay Czar UPDATE: Deferred Equity Compensation expected across the board; AIG Benmosche Compensation Approved

Ken Feinberg has been reviewing the compensation proposals at a number of significant federally bailed-out companies; notably AIG, BofA, Citigroup, GM (and GMAC), and Chrysler (and Chrysler Financial). It was widely expected he will lean heavily towards cutting salary compensation in favor of deferred equity compensation. It is now being reported that AIG's CEO Robert Benmosche's compensation for 2009 has formally been approved by Feinberg. Feinberg wrote to AIG's compensation committee that Benmosche's $3 million in salary and $4 million in deferred equity compensation was "appropriate" when compared to peer executives.

Kenneth Feinberg more appropriately carries the title of Special Master under the Treasury Department, but is frequently referred to as the Compensation Czar. The Obama Administration anticipates Feinberg's decisions to be a model "best practices" moving forward, but it is apparent the Federal Reserve may move in a slightly different direction when it announces its pay re-regulation as regards the banking industry. The bottom-line across the board in both instances, however, is to effecitvely incentivize workers to forgo undue short-term risks so as to concentrate on long-term financial profitability and stability.

Previous blawg discussion by either Allen or myself regarding Kenneth Feinberg can be found here. All blawg discussion regarding executive compensation can be found here.

Photo credit: Associated Press via WSJ.

Feinberg Update: DEADLINE TODAY for receipt of executive compensation proposals

Seven of the largest recipients of federal aid in the last calendar year - AIG, BofA, Citigroup, GM, GMAC, Chrysler, Chrysler Financial - are required to submit compensation proposals to Compensation Czar Feinberg by today. Some have already submitted their proposals. The proposals detail how the companies intend to pay their highest paid executives: specifically regarding the 25 highest earners, and formulaicly regarding the next 75 highest earners. Allen has written about Feinberg and his objectives here. I want to briefly write now on how this deadline will shake out and what steps are ahead.

Feinberg, and by proxy the Obama Administration, effectively has a veto power here. Feinberg is expected to negotiate with the companies over a period of 60 days, but he will either accept or reject the proposals at the end of that period. It is important to note that Feinberg cannot relieve the companies of performance under executory compensation contracts entered into prior to enactment of TARP. Those watching the progression of events expect, at most, Feinberg to push for pay that is in some way related to company performance, and equity compensation in the form of restricted stock grants.

Eye Candy Note: NYAG Cuomo detailed the cash flow of some of these seven in his July Report. Summarized here:

• BofA received $ 75 billion in federal aid, earned $ 4 billion in 2008, and awarded $ 3.33 billion in cash and equity bonuses (for period 2008).
• Citigroup received $ 65 billion in federal aid, loss $ 27.7 billion in 2008, and awarded $ 5.33 billion in cash and equity bonuses (for period 2008).

Of uber interest: folks are not sure if these compensation proposals will be made public, and if they will be, at what date. White House Press Secretary Robert Gibbs expressed uncertainty yesterday, suspecting that although Feinberg's decisions will be made public, the proposals may not be.

FYI: Feinberg's work as Compensation Czar is pro bono.

Executive Compensation Update: Guaranteed Bonuses and the Compensation Czar

(Again, mini-posts this morning in light of time constraints - thanks!).

Compensation Czar Feinberg's August 13th deadline for submission of compensation proposals is fast closing. Subject to the deadline are seven firms that received federal funds earlier this year, including Citigroup. In light of this deadline, I found it really interesting that guaranteed bonuses - uncommon during the worst of the economic crisis - have made a noticeable comeback.

Feinberg's 8/13 deadline is not the only government impetus to try and chain down executive compensation ... but a cynic might say both sides - firms vs. public outrage (proxy government) - of this argument are operating blind to the other's actions. So who is in real need of the reality check? FWIW.

The Compensation Czar

Last month, the Obama administration announced the appointment of Kenneth Feinberg (photo at left) as the Special Master for TARP Executive Compensation (the “Special Master,” commonly referred to as the “compensation czar”). At the seven firms that have received “exceptional assistance” from the government - AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial - the Special Master must determine whether the compensation payments and structure for the senior executive officers and the twenty next most highly compensated employees may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. Additionally, regarding any remaining executive officers and the 100 most highly compensated employees, the Special Master must determine whether the compensation structures may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. The Special Master may also render advisory opinions on his own initiative as to whether compensation payments or structures at any TARP recipient meet the appropriate standards.

Whenever the Special Master reviews compensation payments or structures for consistency with the purposes of TARP or conformity with the public interest, he must consider the following principles: 1) avoidance of incentives to take unnecessary risk, 2) taxpayer return, 3) appropriate allocation among the components of compensation, 4) appropriate portion of performance-based compensation, 5) comparable structures and payments, and 6) employee contribution to TARP recipient value.

Feinberg is a lawyer who has worked for the federal government, and more recently has headed his own law firm. He is perhaps best known for his role as Special Master in charge of dispensing billions of dollars to victims of the 9/11 attacks. Feinberg, however, apparently has no experience working at financial institutions, insurance companies, or car manufacturers, and yet he will be setting pay for over 100 employees at each of seven companies in these industries.

The labor market in the banking industry is highly competitive, with certain institutions - notably foreign banks - aggressively pursuing employees of banks that received TARP money. Will Feinberg allow these companies to pay their highly compensated employees enough to prevent them from jumping ship? The two car companies subject to the Special Master’s oversight are winding their way through bankruptcy court and are trying to reinvent themselves to become competitive in a highly volatile industry. What is the appropriate pay for the CEO of a car company, once the crown jewel of American manufacturing, which is feverishly switching gears to build cars that people want? The six principles mentioned above will help, but they will get Feinberg only so far. I question whether Feinberg has the proper experience or can possibly acquire all the necessary information about the banking, insurance and car industries to deem what constitutes appropriate pay for the affected highly compensated employees.

Bonus Restriction on Banks Receiving Government Bailout Money

It is well known that as part of the bank bailout bill, Congress imposed pay restrictions on executives at banks that receive government money. These pay restrictions were further strengthened in the American Recovery and Reinvestment Act of 2009 (the “Recovery Act,” a/k/a the “stimulus bill”). A noteworthy and particularly controversial pay limitation in the Recovery Act requires that bonuses to a certain number of employees (depending on how much government money the bank receives) be limited to long-term restricted stock, and the stock’s value may not exceed one third of the employee’s total annual pay (the “bonus restriction”). For example, an executive subject to the bonus restriction who is paid $1 million in salary would be limited to a bonus of $500,000 in the form of long-term restricted stock. The more government money a bank receives, the greater the number of employees that are subject to the bonus restriction. For example, a bank that receives $500 million or more from the government must apply the bonus restriction to its senior executive officers and at least the 20 next most highly-compensated employees.

The question of how to identify a bank’s “most highly-compensated employees” was left open in the Recovery Act. One interpretation was to designate “most highly-compensated employees” based on pay in the current fiscal year, while another interpretation was that “most highly-compensated employees” were identified based on pay in the previous fiscal year. The Treasury Department’s interim final rule, effective as of June 15, 2009, settles the question by stating that “most highly-compensated employee” status is determined based on annual pay earned in the prior year. This, however, does not resolve the “intentional cycling” issue.

Suppose a bank received $500 million of government money in late 2008 and will not repay the government for at least another couple of years. Pursuant to the Recovery Act, the bank in 2009 must impose the bonus restriction upon the twenty five employees who earned the most money in 2008 (“Group 1”). Due to the pay restriction, however, Group 1 is not likely to be the highest paid in 2009, so a different group of twenty five employees (“Group 2”) would be the highest paid in 2009. Group 2 would thus not be allowed to earn bonuses in 2010 while Group 1 could. This could result in a weird game of leapfrog where groups of twenty five employees trade places as the highest paid every year.

The Treasury Department addresses this issue in the interim final rule. It offers a couple of potential methods to mitigate “intentional cycling” by: identifying “most highly-compensated employees” based on an average of the preceding two or three years’ annual compensation, or requiring certain “most highly compensated employees” identified for one year to remain subject to the restriction for a certain number of additional years regardless of subsequent levels of compensation. The Treasury Department invites comment on this issue, including the extent “intentional cycling” is likely to occur, and potential ways to address the issue.

If you wish to comment on this issue or any topic addressed in the interim final rule, you can contact the Treasury Department by e-mail at executivecompensationcomments@do.treas.gov or via snail mail (in triplicate) to Executive Compensation Comments, Office of Financial Institutions Policy, Room 1418, Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.