Bankruptcy

Bailout Bill Executive Compensation Provision: Lipstick on a Pig

By Adam Levitin

The bailout bill as defeated in the House today was some 110 pages. But there was little that made it substantively different from the two and a half page bailout plan originally proposed by Secretary Paulson. So what was all that other stuff? Lots of window dressing. Lots and lots of it to pretend that there were serious conflicts of interest provisions or help for consumers or limits on executive compensation.

Let me just illustrate what a fraud the executive compensation limits proposed are. Currently, businesses may deduct all salaries under $1 million from their corporate income. The proposed bailout bill would lower that deduction to $500,000 for certain executives at certain companies. Already, not a real big penalty for excessive executive compensation--the tax deduction gets limited by $500K/executive. But here's the catch: the deduction cap only applies to the top 3 executives at companies that have over $300MM in dealings with the Treasury under the bailout program, excluding direct sales.

In other words, the bailout bill's cap on executive compensation only applies to 3 people at really big financial institutions that enter into guarantee arrangements with Treasury. At worst, this means that an addition $1.5MM is not deductible from some very large financial institutions corporate income. $1.5MM is a rounding error for big institutions. The lost deduction on the salaries between $500,000 and $1MM will just come out of shareholders' dividends which won't be changed by so much as a penny. And for smaller institutions, e.g., hedge funds...probably won't apply to them. Given that these institutions are reporting losses for the current year, this is pretty much a throw away anyhow. But for Congress to pretend that it did anything about executive compensation is laughable. I guess they were hoping that no one would look at the tax provisions (rather than the executive compensation provisions) that were buried on page 101 of a 110 page bill.

And the golden parachute limitations? First, it only applies to the top 5 executives, not others. Second, there are already strict limits on executive compensation for troubled banks. The universe of people affected by the executive compensation provisions in the failed bailout proposal would have been very small indeed. (I would be surprised if there are other twists that make this ineffective: tax folks, what am I missing?)

And guess what the executive comp provisions don't cover? The big gedile...stock options. If you're an exec whose options are out of the money now, guess what, the board can issue you more (at no cost to the company really), and there's nothing in the bailout bill that will stop that.

So what did Congressional leadership do with this bailout bill? Put lipstick on a pig. I wonder how many Congressmen who voted for the bill know just how impotent the executive compensation, oversight, and homeowner protection provisions are. There's a reasonable bailout bill that could be passed. But this wasn't it.

Full post as published by Credit Slips on September 29, 2008 (boomark / email).