Barack Obama, bad cop, used the State of the Union address to talk tough about fighting white-collar crime, announcing new initiatives to investigate financial industry fraud and the abusive lending that led to the mortgage meltdown. Unfortunately, the administration of Obama the “good” cop has spent the past three years allowing the perpetrators of those same offenses to escape serious punishment.
The latest indication of the administration’s weak enforcement record came in a report issued just a day before the State of the Union by the Office of the Special Inspector General for the Troubled Asset Relief Program, known inside the Beltway as SIGTARP. Not only have the feds failed to put the financial fraudsters behind bars—they can’t even control the industry’s bloated executive pay packages.
Soon after he took office in 2009, Obama made headlines by denouncing banking industry bonuses as “shameful.” He went on to impose $500,000 limits on the cash compensation of senior executives at firms that had received “exceptional assistance” from the Treasury, meaning that they had gotten the fattest bailouts during the 2008 financial crisis. The firms in that category were AIG, Bank of America and Citigroup as well as General Motors and Chrysler, along with the finance affiliates of those automakers.
The impact of the move was diminished somewhat after it soon came to light that AIG was giving out scores of seven-figure bonuses to the employees of the unit that caused the collapse of the company and necessitated a massive federal intervention. The Obama Administration and Congress responded to the uproar by creating a “compensation czar” under the auspices of the Treasury Department to oversee executive pay practices at the designated firms.
Kenneth Feinberg, the Washington lawyer named as czar, challenged the pay deals these firms had already made with their top officers and had successes such as getting outgoing Bank of America CEO Kenneth Lewis to forgo all of his pay for 2009. In October of that year, the Obama administration said that it would impose a plan devised by Feinberg to cut pay of top earners at the designated firms by about 50 percent. For more than a year there was a steady stream of news articles about the tough measures being meted out by Feinberg until his resignation in September 2010.
According to the new SIGTARP report, much of this was no more than Kabuki theatre. It found that the efforts of Feinberg in what is formally known as the Office of the Special Master (OSM) were less than draconian: “The Special Master could not effectively rein in excessive compensation at the seven companies because he was under the constraint that his most important goal was to get the companies to repay TARP [funds].” The report admits that OSM did bring about some pay reductions, but the idea of a $500,000 pay ceiling was rendered meaningless by its decision to approve “total compensation packages in the millions.”
The largest of those packages was received by AIG CEO Robert Benmosche: $10.5 million in total pay, including $3 million in cash, or six times the purported ceiling. This outsized compensation was going to the company that probably did the most to cause the crisis and that will end up costing the government more than any other bailed out firm.
Many others at the designated firms also broke through the flimsy ceiling. Overall, SIGTARP found, OSM approved 68 pay packages in excess of $1 million in 2009, 71 in 2010 and the same number in 2011. In the latter years there were fewer pay packages for OSM to review, since Citigroup and Bank of America had repaid the special assistance that triggered the oversight of their compensation practices. There have been reports that they took the step precisely to escape that oversight. Given how lenient Feinberg had been in allowing exceptions, it is not clear why they bothered.
Along with the depiction of OSM as a pushover, what is perhaps most telling about the SIGTARP report is the appended response from the Treasury Department. Despite all evidence to the contrary, Treasury claims that “OSM has succeeded in achieving its mission.” It also tries to rewrite history by claiming that the $500,000 limit was not a ceiling at all, but simply “a discretionary guideline.” And it insists that OSM allowed the firms to exceed the maximum only for good reasons, even though SIGTARP pointed out that those reasons were not documented.
Like Feinberg, President Obama has tried to project an image of being tough on corporate abuses while repeatedly caving in behind the scenes. It remains to be seen whether Obama, facing pressures from the Occupy movement and the threat of losing his re-election bid, finally gets serious about prosecuting financial crime or continues the charade.