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Wall Street titans prepare to feel the pain

By Stephanie Kirchgaessner, Daniel Dombey in Washington
September 26, 2008 17:30 IST
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Hank Paulson might not be ready to back down publicly from his assertion that his proposed $700bn bail-out of Wall Street will be less effective if Congress imposes curbs on executive pay at firms seeking government assistance. But the US Treasury secretary, and former Goldman Sachs chief executive, will have known that he had already lost the argument when he woke up on Wednesday to face another battering on Capitol Hill.

At a hearing on Tuesday, Christopher Dodd interrupted proceedings to categorically state that the administration should "count on" executive pay being a part of any legislation approved by the Democratic-controlled Congress. "We'll figure it out, but it's going to get there," he said.

Democrats are not the only ones who have called for Wall Street titans to feel some personal pain. Republicans on Capitol Hill who would otherwise be loath to agree to any federally-mandated limits on executive pay have been quick to embrace the idea, and both presidential candidates have endorsed as-of-yet-vague proposals that would limit how much executives at bailed out firms could earn.

"It's wrong to ask teachers, farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons," Republican presidential hopeful John McCain said on Tuesday. "The senior leaders of any firm that is bailed out should not be making more than the highest-paid ­government official."

A draft proposal by Mr Dodd would give the US Treasury the power to ban "inappropriate or excessive" payments. It would also install a so-called "clawback" provision that would require executives to give up benefits if results are shown to have been overstated. Proposals circulating in the House would give shareholders a vote on pay. Most Washington insiders agree that in the long run, the administration will concede the fight to shore up some political capital for more important battles.

"The reason the administration ultimately gives in is because this is not a universal, all-encompassing limit on executive pay. The bailout itself is time limited," one congressional aide said. "It's not going to make everyone happy that has been pushing for (extensive) reform, not by a long shot."

But inclusion of some executive pay reform - however limited it might be - could give political momentum to advocates for broader changes in US-style executive pay down the road, the person added.

Business lobbyists privately acknowledge there is no way to stop the congressional tide because there are no effective arguments they can make, given taxpayer funds are at risk. Mr Paulson's stance - that fewer executives might participate in the programme if their pay is limited - was eviscerated by Barney Frank, the chairman of the House financial services committee, who described such behaviour as "selfish and unpatriotic".

Bruce Josten, the senior lobb-yist at the US Chamber of Commerce, said he fully accepted some limits on executive pay would be approved, but he pointed to some risks in the plan.

"If you think about it this way, Paulson gives your bank billions to clean upthe mess, do we want the guy who is taking care of that earning $50,000 a year? We want the best and (the) brightest."

One banking lobbyist said, in hindsight, that Wall Street chief executives might have done themselves a favour by pre-empting Congress and agreeing to pay themselves $1 next year.

"Now they look like they are being punished," the ­person said. "And then when guys start quitting, they are going to look like real babies."

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Stephanie Kirchgaessner, Daniel Dombey in Washington
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