Bailouts and Bonuses

Posted Aug. 30, 2009, at 6:35 p.m.

Multimillion-dollar bonuses are being handed out once more, as glimmers of recovery appear with the help of federal bailouts. Are they necessary? Or do they signal a return to the old greed and high-risk dealing that led to the economic meltdown and continuing mess?

Fortunately, a hard-boiled expert in such matters, known for a fine combination of fairness and toughness, is on the case. He is Kenneth R. Feinberg, a Washington lawyer who has begun work as “special master” for compensation at the top seven recipients of federal bailout money.

His field is mediation and dispute resolution, and he is best known for his 33-month pro bono job as special master of the U.S. government’s $7 billion September 11th Victim Compensation Fund. Later, he administered a memorial fund to benefit the victims of the 2007 Virginia Tech mass shooting.

This time, instead of dealing with bereaved families or survivors of a terrorist attack, his work is monitoring compensation for executives of big companies that have not yet repaid the money they borrowed from the government: Citigroup, Bank of America, American International Group, Chrysler, Chrysler Credit, General Motors and GMAC.

He is conferring with the seven firms about pay plans each has submitted for their top 25 executives. He told Reuters that the law creating his position requires him to take market forces into account. That is, he must balance holding compensation to a reasonable level with permitting pay plus bonuses to be high enough to keep executives from flitting to some other company that has no restrictions.

He said that his authority could extend to Goldman Sachs, which has paid back the bailout money. And he can use a “clawback” provision to try to recover compensation already paid by the seven companies and by any other company that received government assistance.

Among the Citigroup submissions was its contract with an energy trader who reportedly stands to get as much as $100 million this year. The New York Times reported that Citigroup executives argued that the pay package could be exempt from review. Citigroup also contended that employees of its trading unit received a percentage of the profits, not discretionary bonuses.

The guidelines require Mr. Feinberg to consider comparable pay packages in the industry but, at the same time, avoid creating incentives for short-term risk-taking.

For Mr. Feinberg, who faces a 60-day deadline for the pay decisions, the bottom line is that he will be making final, binding decisions.

If his decisions cause outraged cries from the big bankers, it will mean that, at last, somebody is doing something about those huge bonuses that have stirred such popular resentment.

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