OCTOBER 16, 2009

Lawmakers Avoiding Direct Interference in Wall Street Pay

By MICHAEL R. CRITTENDEN

WASHINGTON -- Assailing Wall Street's excesses is as natural as shaking voters' hands for lawmakers who are eager to pull out the pitchforks when executive pay catches the public's attention.

But with banking and investment powerhouses prepared to pay record bonuses less than a year after many were rescued by taxpayers, the reaction from the Democratic majority in Congress has been muted. In sharp contrast to the furor surrounding insurer American International Group Inc. in March, when aggressive taxes on bonuses were seriously debated by Congress, lawmakers instead seem content to carry only a small stick when dealing with the finance industry.

Lawmakers are hesitant to be too active on Wall Street pay because they don't want to be seen as having too big a role in the economy. The financial crisis forced Congress's hand last year, resulting in a number of members casting uncomfortable votes for the $700 billion bailout package. Now that markets are calmer, many are cautious about taking steps that could suppress a fuller recovery.

"I think it's a delicate balance ... [Wall Street pay] does seem large, but at the same time you don't want to stifle your sales force," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a bank lobbying group.

That has sparked unease on the left. "I try not to be naive, but I'm surprised at how little is being done to restrain Wall Street so soon after an epic collapse," said Robert Weissman, president of liberal consumer group Public Citizen.

Fundamental changes to compensation rules are instead likely to come through the Treasury Department and Federal Reserve. Kenneth Feinberg, the Obama administration's pay czar, is expected soon to make major changes in the compensation packages for 175 of the most-highly paid executives at the seven firms that have received the most government aid. Mr. Feinberg also is reviewing the pay structures for the next 75 top-paid employees at each firm.

The Fed will focus on "incentive compensation" across a firm's entire structure, not just at the executive level, with the goal of identifying situations where pay structures encourage excessive risk-taking. Mortgage brokers being paid to write as many loans as possible, rather than writing quality loans, would be the type of thing regulators would scrutinize.

Fed governor Daniel Tarullo, asked about compensation levels during a Wednesday Senate hearing, said too many financial firms have yet to "come to grips with the fact that things have changed."

"Things are going to change more; that means business models, that means the way of assessing risk, that means how you run your institution," Mr. Tarullo said.

Congress, which has embarked on the most ambitious rewrite of securities laws since the Great Depression, is embracing a relatively low-key effort on executive pay. Central to the effort is so-called say-on-pay legislation that generally would give shareholders of a company a nonbinding vote on its executives' pay packages. The Obama administration has expressed support for the provision as part of the broader revamp of financial regulation. Earlier this year, Congress tamped down Wall Street bonuses, but just for banks receiving cash from the Treasury Department's Troubled Asset Relieve Program.

Rep. Barney Frank (D., Mass.), a staunch advocate of the measure, said this year's rebound in Wall Street pay underscores why shareholders should have a greater say. He fended off charges from the left that his plans were too weak. "I don't think the public sector should decide [pay levels], but it's important for shareholders to have more say."

Some lawmakers on Capitol Hill plan to push for more-onerous rules. Rep. Brad Sherman (D., Calif.) said the largest financial firms are benefiting from an implied government guarantee and should face stricter limits than just a nonbinding shareholder vote.

—Aaron Lucchetti contributed to this article.

Write to Michael R. Crittenden at michael.crittenden@dowjones.com

Printed in The Wall Street Journal, page A19