The Pay for Performance Act of 2009 prohibits the payment of “unreasonable or excessive” compensation, including bonuses that are not based on performance, by Fannie Mae, Freddie Mac, the federal home loans banks, and firms that have received funds under the Emergency Economic Stabilization Act. The Treasury Secretary must define “unreasonable or excessive” compensation and outline what constitutes an appropriate performance-based bonus using criteria including the stability of a financial institution, ability to repay taxpayer funds, and adherence to appropriate risk management requirements. The prohibition only applies while government payments to the firms are outstanding. Firms subject to the Pay for Performance Act must report their compensation practices to the Treasury Secretary. Finally, the legislation applies bonus prohibitions included in the American Recovery and Reinvestment Act to all employment contracts. The American Recovery and Reinvestment Act currently exempts employment contracts made before February 11, 2009 from these prohibitions.
The Middle-Class Position:
Middle Class Supports. Taxpayer bailout funds should be used first to prevent a collapse of the financial system and next to make the financial system work for current middle-class Americans by addressing the housing crisis and increasing the availability of loans. Under no circumstances should taxpayer funds pay exorbitant bonuses or excessive compensation. The compensation restrictions imposed by the Pay for Performance Act provide taxpayers with a measure of accountability by helping to ensure that taxpayer funds are not misused by financial institutions whose very existence is largely predicated on government assistance. The legislation does not excuse the government’s failure to include meaningful restrictions on compensation in the original financial bailout legislation. However, the bill protects middle-class taxpayers by preventing firms from using public money inappropriately for excessive compensation and bonuses.
As difficulties for middle-class Americans worsened at the end of 2008, Congress prioritized the country’s financial sector instead of struggling homeowners and the growing ranks of the unemployed. Legislators rushed passage of the Emergency Economic Stabilization Act (EESA), arguing that a failure to shore up the financial system would cause great pain throughout the economy. In exchange, they promised strict oversight and accountability for the $700 billion of taxpayer money that would be funneled to the very banks and financial institutions responsible for the current crisis. But strong measures to ensure appropriate use of taxpayer funds were not included in EESA. Despite a majority government stake and commitment of 183 billion of government funds, American International Group, for example, paid executives bonuses unthinkable to the vast majority of working Americans. Similar compensation payments are planned for executives of the housing finance companies Fannie Mae and Freddie Mac, which are also under government control.
From the Experts:
“AIG now claims that it had no [legal] choice but to pay [the bonuses]. However, had the federal government not bailed out AIG with billions in taxpayer funds, the firm likely would have gone bankrupt, and surely no payments would have been made out of the plan. My Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money.” – Andrew Cuomo, Attorney General of the State of New York, March 17, 2009
“These outrageous bonuses [for AIG employees] are yet another example of an economy that has become fundamentally imbalanced. All of the power is concentrated in the hands of the very few at the very top and the gap between CEOs’ and workers’ pay continues to grow.” – John Sweeney, AFL-CIO President, March 18, 2009
“What have we learned thus far? Even in a crisis such as we are experiencing, transparency, accountability and a strategy with clearly delineated goals are necessary to maintain public confidence and the confidence of the capital markets.” – Elizabeth Warren, Chair of the TARP Congressional Oversight Panel, February 24, 2009
Beyond this Bill:
The Pay for Performance Act should be unnecessary. Congress had ample opportunity to ensure that inappropriate bonus and compensation payments were not paid to employees of firms supported by taxpayer dollars. Indeed, Congress continues to expend significant resources trying to right its past failures. The type of ad hoc, retroactive legislation characterized not only by the Pay for Performance Act, but by the Emergency Economic Stabilization Act, calls into question Congress’s commitment to smart, long-term, sustainable investment and to real accountability with consequences for inappropriate behavior. The economic crisis demands flexibility and creative solutions to unexpected challenges. However, payment of bonuses and excessive compensation was not only foreseeable, but legislation to prevent it was proposed. Congress must redouble its efforts to provide the accountability the Pay for Performance Act offers before the middle-class taxpayer is put at risk. The Treasury Secretary must now draft guidelines for “reasonable” compensation and bonuses that put American taxpayers ahead of executives.
Total amount of federal assistance authorized for AIG, according the Government Accountability Office, in dollars: 182,500,000,000
Minimum amount of bonuses distributed to employees of AIG’s Financial Products Subsidiary, the unit principally responsible for the firm’s collapse, in dollars: 165,000,000
Percent ownership stake in Fannie Mae, Freddie Mac, and AIG held by the United States government, respectively: 79.9, 79.9, 77.9
Value of assets received for every $100 the Treasury Department spent on the ten largest TARP investments in 2008, in dollars: 66
Value of securities received by Berkshire Hathaway for each $100 it invested in Goldman Sachs in September of 2008, in dollars: 110
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