The Heart of Wall Street

by Greg Kaufmann

When "pay czar" Kenneth Feinberg appeared before the House Oversight and Government Reform Committee on Wednesday, most members seemed quite pleased with his work.

And why wouldn't they be?

Feinberg, after all, had just slashed cash compensation by 90 percent, and total compensation by 50 percent, for the top twenty-five executives at each of the seven companies under his purview--the seven lemons the American people now own post-bailout--AIG, Bank of America, Chrysler Financial, Chrysler Group LLC, Citigroup, GM, and GMAC.

For politicians whose constituents want, if not blood, then at least some measure of revenge against the bailed-out fat cats, Feinberg's work is a gift.

But it quickly became clear that whatever impact Feinberg's decisions might have on these seven companies, executive excess on Wall Street--which Missouri Democratic Congressman William Lacy Clay pointed out has resulted in CEOs making more than 400 times the average worker's pay, an all-time high--will not be impacted.

Even the initial pay proposals submitted by the seven companies--which one might think would show remorse and responsibility--were very telling.

"The general conclusions I reached after careful evaluation and analysis of the submissions were the same for six of the seven companies," said Feinberg. "Each submission would result in payments contrary to the 'Public Interest Standard,' and should, therefore, be rejected."

Feinberg said the problems with the proposals included "excessive guaranteed cash--salaries and bonuses"; stock that was "immediately redeemable or redeemable without a sufficient waiting period"; too much compensation that wasn't tied to "performance-based benchmarks"; too many "perks," like use of a private jet, country club dues, golf trips, etc.; and insufficient effort to fold contracts that were signed previous to the TARP restrictions "into 2009 performance-based compensation."

In short, the same old, same old.

So Feinberg got to work slashing. The exorbitant cash guarantees were for the most part converted into "stock salary," one-third of which would be annually redeemable after two, three and four years, and some money withheld until all TARP funds are repaid. Perks were limited to a mere $25,000 per individual--cry me a river--with any greater amount requiring Feinberg's approval. In the three cases where individuals didn't agree to renegotiate their pre-TARP pay packages--and, you guessed it, they were employees of AIG--Feinberg said he let them know that would affect 2009 compensation determinations.

"We're very persuasive," said Feinberg with a chuckle.

Feinberg took issue with a widely reported Wall Street Journal story that he had "actually raised cash-based salaries." He said the story cited an instance when he raised an executive's base salary to $475,000--but the article failed to mention that the same individual had taken home a total of $13 million in cash from Citigroup last year. Feinberg insisted that where base salaries were raised, guaranteed cash was dramatically reduced in the overall pay package.

While most committee members were complimentary about Feinberg's work, he did face some critics.

"Who would have thought in the United States of America we would have the federal government telling a private American citizen what they can make?" said Ohio Republican Congressman Jim Jordan. "It's no wonder Americans are frightened, and frankly some members of Congress are pretty scared too, where we're headed."

Ohio Democratic Congresswoman Marcy Kaptur didn't think the waiting period for converting stocks was sufficient. She also said her staff had information that some of the seven companies were past clients of Feinberg's firm, which he adamantly denied. (In fact, if you look at the Feinberg Rozen LLC website, Citibank and AIG are both listed as clients.)

Indiana Republican Dan Burton feared that Feinberg's actions would drive "top talent" away and result in the American public never recouping the bailout bucks. (A consensus was expressed that we already know we will never get back the $180 billion from AIG.) Burton said the restrictions cause people to leave, so that "you have people that don't have the knowledge and the competence to run that company, and so the stockholders--the American people--are in danger of seeing their money going down the tubes."

Chairman Edolphus Towns took issue with that notion. "There's a lot of concern about these folks who have failed going to another company," he said. "I'm not sure that anybody would be too excited about hiring people that fail.... Run one company into the ground, and then you expect to get big money to go to another one and do the same thing?"

Feinberg repeatedly expressed the hope that his work with these seven TARP recipients might serve as a model that Wall Street would "voluntarily" implement.

"One of my objectives is hopefully...other companies on Wall Street and elsewhere will take to heart what I've suggested," he said. "And hopefully the model that is created in my report will trickle and expand beyond these seven companies."

(Red flags: Wall Street, heart and trickle.)

Maryland Democratic Congressman Elijah Cummings acknowledged that in appointing Feinberg, Congress had hoped other Wall Street firms would follow his lead and adopt what is being mandated for these seven companies.

Cummings said his own experience talking to Wall Street execs is "like we're on two different planets," and "multimillion-dollar bonuses [are] like shoeshine money to them." He said he has "no confidence--none" that they will reduce salaries. But he challenged Feinberg to offer the "best argument" he himself would present to Wall Street.

"My best argument would be...because if you don't do this, there may be a time when Congress or others will rein in pay, and will limit your discretion, and will limit your unilateral ability to determine what to pay people," said Feinberg. "To the extent that these [proposals] are ignored in the private market place, the question is, will Congress in its wisdom sit by and allow compensation to go forward under the old regime and the old way of doing things?"

Is that a trick question? Has Feinberg heard of Blue Dogs, the need for sixty votes to end a filibuster, Max Baucus or campaign contributions?

New York Democratic Congresswoman Carolyn Maloney pointed to some early indicators that Wall Street is already lagging behind the times in compensation reform. She said the five largest banks in the UK have agreed to comply with G-20 executive compensation rules, including clawbacks for poor performance, and an independent compensation committee. The UK has also adopted a shareholder vote on executive pay.

Feinberg will now move on to design the compensation structure for execs 26 through 100 at these companies, and address next year's salaries for the top 25 as well. He will also turn his attention to AIG's $200 million in bonuses for the disastrous financial-products division, which are due in March. While he can't void those contracts, he can let AIG know that the bonuses will be a determining factor in upcoming salaries if they aren't renegotiated.

It's undeniable that Feinberg has had an impact on the companies in his purview. But it's equally clear that the casino culture that created this mess--including guaranteed exorbitant salaries and bonuses that have nothing to do with performance--remains untouched. Despite Feinberg's wish, Wall Street ain't the Yellow Brick Road, and the execs aren't Tin Men. There's no post-bailout heart waiting to be discovered here.