Paulson gives ground, says bailout must address CEO pay

By Patrick Rucker and Glenn Somerville

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson agreed on Wednesday that a proposed $700 billion proposal to bail out financial firms must be modified to put some limits on the paychecks of executives whose firms use it.

Testifying before the U.S. House Representatives Financial Services Committee, Paulson said he understood the public anger over the huge salaries that Wall Street executives have been paid, but still appealed for quick support for the package.

"This is a serious problem and I agree, we must find a way to address this in the legislation, but without undermining the effectiveness of this program," he said, without offering any indication of what type of limits might be acceptable.

The comments marked a significant retreat from Paulson's past position that imposing pay limits might make Wall Street firms avoid using the bailout facility and undercut the effort to rid the financial system of bad mortgage-related assets.

President George W. Bush was scheduled to make a televised address at 9 p.m. EDT (0100 GMT, Thursday) to appeal to Americans to support the bailout as a necessary measure to help the economy rather than a financial bootstrap for reckless Wall Street executives.

BENEFITS FOR BUSINESS

One widely heard criticism was that the bailout would benefit banks while putting taxpayers at risk, including those who borrowed sensibly and kept up their mortgage payments.

Federal Reserve Chairman Ben Bernanke put the case for a bailout in populist terms, saying jobs, savings and the ability of ordinary Americans to borrow, all hang in the balance.

"It's really a question of saying, 'There's a hole in the boat, you did it, why should I help you?'" he said. "Well, there's a hole in our boat. We need to fix it and then we need to figure out how to make sure it doesn't happen again."

While Paulson gave ground on the issue of executive pay, he offered no indication that he was willing to yield to congressional calls that the government receive an equity stake in firms that benefit from the bailout.

Many lawmakers have argued that forcing companies to yield some equity in return for the right to offload bad assets would protect taxpayers by increasing the chances for a profit, or at least a reduced loss, when the assets were eventually resold.

"I understand the view that I have heard from many of you on both sides of the aisle, urging that the taxpayer should share in the benefits of this plan to our financial system," Paulson said. "Let me make clear -- this entire proposal is about benefiting the American people, because today's fragile financial system puts their economic well-being at risk."

Paulson and Bernanke have both argued that companies may shy away from participating in the program if shareholder value was diluted, undercutting the plan's effectiveness.

OPTIONS STUDIED FOR MONTHS

In his testimony on Wednesday, Paulson revealed that the Treasury had been considering a bailout plan, among other options for settling markets, for months.