CEO pay crackdown is toothless

By Michael Brush

Remember that old ruse "Heads I win, tails you lose"?

Wealthy CEOs at banks may soon play that trick with as much as $700 billion of your money, thanks to a big shortcoming in the massive bailout bill working its way through Congress.

Here's how the game works: First, bank CEOs negotiate big paychecks by arguing they need rich rewards to compensate for the headaches of the mortgage mess. Then the government uses taxpayer money to purchase messy mortgage debt from the banks -- taking away their biggest problem.

But the CEOs will still get the big bucks. That includes both those who collected millions while they led their banks into trouble -- many of whom have since bailed out -- and those who signed on more recently to fix the problems. (For a look at some of them, see "As banks broke down, CEOs cashed in.")

Either way, it's heads they win, tails you lose.

Who really won?

Longtime congressional opponents of runaway executive pay have made a lot of noise about adding measures to rein in CEO pay at banks that want to use taxpayer funds to move dodgy loans off their books.

But so far, it looks like they'll win only small concessions from Treasury Secretary Henry Paulson. He has opposed stringent pay measures, saying they could reduce the number of banks willing to participate in the plan.

Of course, after the deal fell apart Monday, things could still change.

It'll be too bad if Paulson get his way. The juicy pay deals for CEOs at the banks most likely to benefit from the bailout -- for instance, Wachovia (WB, news, msgs) and Merrill Lynch (MER, news, msgs) -- were struck well before anyone knew the government would make their jobs so much easier.

Now that the government is offering to take away their biggest job challenge, it makes sense to ask those CEOs to go back and review their juicy pay packages.

But that's not likely to happen because the provisions lawmakers made such a show of "winning" have no teeth.

No real standards

Here's the biggest problem: The latest versions of the mortgage bailout bill would leave it up to Paulson, the former head of Goldman Sachs (GS, news, msgs), to decide whether CEO pay is excessive at a bank getting a bailout from the government.

Sarah Anderson of the Institute for Policy Studies calls this a bad joke. "That is not the job for a guy who made hundreds of millions of dollars on Wall Street," she says. "He has no perspective on what's excessive."

Two other provisions designed to deal with the issue look redundant -- and dumb.

One would "claw back" pay from CEOs in cases where fraudulent earnings reports helped them reap bonuses. This is a great idea, especially with rumors circulating that the FBI is investigating potential fraud at Lehman Bros. (LEHMQ, news, msgs), Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and American Insurance Group (AIG, news, msgs).

But we already have this provision in the Sarbanes-Oxley Act, says Patrick McGurn, a special counsel for Institutional Shareholder Services. So it seems redundant, and, of course, fraud isn't easy to prove. Further, the CEOs who led many of the most troubled companies during the height of the lending boom have already left with their millions.

A third provision would bar golden parachutes while banks got public assistance. So what? CEO pals on the board can simply put the pay packages back in place after the bailout. And again, many of the CEOs most to blame have already parachuted out.

This isn't just the usual debate about how much CEOs earn. Those who deliver should be paid well for it.

But the heart of the problem here is that banking is supposed to be about taking risks in exchange for money. If you misjudge the risks and taxpayers bail you out of your problem, should you get the big rewards just the same?

That's what's probably going to happen. CEOs likely will take home huge paychecks at the banks most likely to go to taxpayers for help with their home-mortgage problems -- banks such as Merrill Lynch, Bank of America (BAC, news, msgs) and Wachovia.

Let's look at some of the details.

Continued: Who's making the big bucks

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