In fact, though, the department may do more than that. It is well-known in Washington, according to Barth, that Treasury did not agree with all elements of Sen. Dodd’s late amendment to the compensation provisions. “We may see some relaxation on some of these standards from Treasury,” he suggested.
Any such relaxation could, of course, carry potential political risks, given the public’s mood toward alleged excess on Wall Street. It might be especially unwise to dial back limitations on luxury expenditures that were included in the executive compensation section of the law, and which also need further guidance from Treasury in order to be practicable.
The luxury spending provision states that firms accepting TARP money must have a written policy regarding “excessive or luxury expenditures, as identified by the Secretary.” It specifically singles out spending on entertainment, events, office and facility renovations, and air travel or other transportation as areas that may receive the greatest scrutiny.
The common denominator of those activities is the black eyes bailed-out firms have suffered following media reports about the firms engaging in them. “There will be more definition around this by Treasury, but I expect most boards of directors will be very strict on those policies,” Barth said.
Poerio was incredulous. “The list they gave was straight from the front pages of the newspapers,” he said. “It’s incredible that now we’re taking the headlines of the moment and putting them right into law.”
This may signal a coming crossroads whereby certain provisions of the stimulus legislation will be applied beyond entities that accept bailout money, according to Poerio. “One line of thinking is that this is all appropriate in the context of protecting taxpayer monies where they’re invested,” he said. “But it is such an extreme response to public outcry that it wouldn’t surprise me to see Congress be very active in taking what’s in this law and applying it more broadly.”
Also carrying implications for companies generally is a prohibition on compensation that provides executives with an incentive to take “unnecessary and excessive risks,” a remnant from the original TARP legislation. As before, no further explanation of that phrase is given.
The provision reflects an anti-risk climate that has settled in so thickly that Barth said he has been advising all his clients, not just financial services firms, to analyze in greater detail how their compensation programs match up with their risk assessments and risk-mitigation plans and their strategic goals and objectives. “You should be doing this regardless what industry you’re in, even if you’re a private company,” he said.
To TARP or Not to TARP
Meanwhile, one aspect of the stimulus law that is not open to much interpretation is a flat-out prohibition on golden parachutes for executives departing from bailed-out firms. While that term historically has been held to mean lucrative compensation awarded to an executive upon a change in control of the company, the new law defines it as “any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.” Observed Poerio, “That provision is severe.”
Indeed, overall, the new compensation limitations are going to have “a dramatic effect,” he said.
That is, if they don’t scare away many firms that otherwise would gladly take the government’s money. That’s what Barth is predicting.
“Almost all of the institutions that are participating so far are financially healthy enough that they don’t need the money to survive,” Barth said. “And that’s one of the main things TARP is for — to make the healthy healthier, to allow them to have sounder balance sheets and more of a capital base that would encourage more lending and unfreeze the capital markets. But it will be very hard for firms to participate now. Most are not going to take any money.”