TARP overseer wants stricter executive compensation

WASHINGTON (Reuters) - Financial regulators should consider revoking bonus pay for executives of failing institutions needing government help, said a watchdog panel for the government’s $700-billion financial bailout on Thursday.

Executives might be motivated to avoid excessively risky behavior if faced with the prospect of losing their bonuses, the Congressional Oversight Panel said in a report.

The recommendations came as officials reported that Wall Street companies paid $18.4 billion in bonuses to employees even though the government had to save the companies from collapsing.

U.S. President Barack Obama said on Thursday that large bonuses received by Wall Street executives last year were “the height of irresponsibility” and “shameful”. He said his administration would tell financial executives that they needed to show restraint.

Under the Troubled Asset Relief Program, or TARP, the Treasury Department has handed out $293 billion to shore up banks such as Bank of America and Citigroup, as well as insurer American International Group. U.S. automakers also have received taxpayer aid.

Recipients of government funds must follow rules limiting executive pay. But critics say they may not be strict enough.

TARP’s inspector general, or internal watchdog, said he would demand that companies receiving money explain how they are complying with restrictions on executive compensation.


The panel chaired by Harvard University law professor Elizabeth Warren, said more oversight of derivatives and credit rating agencies was needed.

The top three credit rating agencies, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, have been criticized for giving top ratings to complex securities that later deteriorated.

The Securities and Exchange Commission has adopted new rules to mitigate conflicts of interest at rating agencies, which are mostly paid by the banks or issuers whose securities they rate. The rules prohibit raters from rating their own work and bans those who help determine a credit rating from negotiating any fees.

However, the panel said the SEC or a new regulatory body could do more and impose limits on the proportion of revenues of rating agencies that are derived from banks and issuers.

“The credit rating system is ineffective and plagued with conflicts of interest,” the report said.

The report made recommendations to limit excessive leverage in U.S. financial institutions and said rules were needed to ensure that banks have enough capital to cover expected increases in loan losses.

The panel also said Congress should designate a ‘body’ charged with identifying the degree of systemic risk posed by financial institutions, products and markets.

Standard & Poor’s is part of McGraw-Hill Companies Inc, and Fitch Ratings is majority-owned by Fimalac SA. Moody’s Corpis the holding company for Moody’s Investors Service.

Reporting by Rachelle Younglai; editing by Carol Bishopric