October 26, 2009 / 3:31 PM / 10 years ago

UPDATE 1-US bank regulator sees risk in pay czar rulings

* Dugan says pay czar has tough balance to strike

* Sees risk in pay czar rulings causing talent flight

* Says resolution authority bill needs to be strengthened

By Karey Wutkowski

CHICAGO, Oct 26 (Reuters) - A top U.S. bank regulator said on Monday that there is “very real concern” that some large financial firms that have received massive taxpayer bailouts could be harmed by the rulings of the Obama administration’s pay czar.

Comptroller of the Currency John Dugan said pay czar Kenneth Feinberg has a difficult challenge to both rein in outsized paychecks at the seven firms he has jurisdiction over, while not being so harsh that top performers leave the companies.

“We hope that that balance has been struck in a way that recognizes the significant government involvement but on the other hand doesn’t result in the deterioration (of the firms) or talent leaving the companies unduly,” Dugan told reporters during the American Bankers Association annual convention. “Time will tell on that.”

Last week Feinberg slashed compensation for the top 25 earners at the seven companies for the final two months of the year, when bonuses are typically paid.

The seven companies are American International Group Inc (AIG.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N), General Motors Co [GM.UL], Chrysler, GMAC and Chrysler Financial.

Bank of America immediately balked, saying that Feinberg’s rulings would put it at a disadvantage as it competes with firms not under the pay czar’s thumb. The bank said its employees were already being poached by rivals.

Dugan also discussed the need to strengthen the administration’s plan for dealing with troubled financial giants.

The Obama administration plans to send new language to lawmakers shortly on so-called resolution authority, which would give the government the power to dismantle systemic financial firms if they become unstable.

Dugan said the new proposal needs to “make it far more likely that equity holders and creditors sustain losses.” He also said it should still retain flexibility for the government in how to deal with each case.

The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may take out some language that would allow for temporary bailouts. (Reporting by Karey Wutkowski; Editing by Tim Dobbyn)

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