As Geithner tries to get out of the way of the AIG bonus train wreck, it looks like the designated sin eater is going to be Chris Dodd:
The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.
So Treasury says Chris Dodd did this? In a word. . . no.
What they’re talking about is a clause in the American Recovery and Reinvestment Act, which was signed into law by President Obama on Feburuary 17, and places limits on executive compensation for TARP recipients. According to the white paper obtained by FDL written by AIG to explain its legal justification, the $1.2 billion in bonuses they say they are contractually obligated to pay in 2009 are exempt from these limits:
We have been advised that the bonus provisions of the American Recovery and Reinvestment Act of 2009 prohibiting certain bonuses specifically exclude bonuses paid pursuant to pre-February 11, 2009 employment contracts.
So they are paying out these bonuses on contracts written prior to February 11, 2009. Which includes everyone who had a contract at the time the bill was passed. So, in effect, the only people who would be covered by the limitations of the act are people who signed contracts in the past 35 days.
But the bill that passed the Senate actually made the compensation limits retroactive, according to the Wall Street Journal:
The most stringent pay restriction bars any company receiving funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.
As word spread Friday about the new and retroactive limit — inserted by Democratic Sen. Christopher Dodd of Connecticut — so did consternation on Wall Street and in the Obama administration, which opposed it.
Who pushed back against Dodd, and told him to neuter the provision? The WSJ says Geithner and Summers:
The administration is concerned the rules will prompt a wave of banks to return the government’s money and forgo future assistance, undermining the aid program’s effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.
The Hill has more:
President Obama and the chairman of the Senate Banking Committee are at odds on how to rein in the salaries of top executives whose companies are being propped up by the federal government.
A senior presidential adviser indicated on Sunday that Obama wants Congress to change the executive compensation provisions passed in the economic stimulus legislation on Friday.
Dodd is not backing down. In an interview with the AP, Dodd said his provisions are needed, especially if Obama asks Congress for more money to bolster the financial sector.
"It will never happen as long as the public perceives that there are people getting rich," Dodd told AP. "Save their pay or save capitalism."
Dodd’s provision was weakened when the bill got to conference. According to those knowledgeable about what happened, it was due to pressure brought to bear by the Treasury out of concern that those with contracts that guaranteed them bonuses would litigate.
Language from the Senate bill, written by Dodd:
(4) a prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period that the obligation is outstanding to at least the 25 most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient;
(a) In General- Notwithstanding any other provision of law or agreement to the contrary, no person who is an officer, director, executive, or other employee of a financial institution or other entity that receives or has received funds under the Troubled Asset Relief Program (or ‘TARP’), established under section 101 of the Emergency Economic Stabilization Act of 2008, may receive annual compensation in excess of the amount of compensation paid to the President of the United States.
(b) Duration- The limitation in subsection (a) shall be a condition of the receipt of assistance under the TARP, and of any modification to such assistance that was received on or before the date of enactment of this Act, and shall remain in effect with respect to each financial institution or other entity that receives such assistance or modification for the duration of the assistance or obligation provided under the TARP.
(Note: These sections appear in Text of H.R.1 as Engrossed Amendment Senate but were not addressed in the conference report, which indicates that their inclusion in the text of the EAS at OpenCongress may have been a mistake.)
Dodd’s version prohibited TARP recipients from paying out bonuses, retention awards or incentive compensation to the 25 most highly compensated employees.
It also prohibited any employee of a company receiving TARP funds from making more than the President. Both provisions would have been in effect so long as a company was receiving TARP funds. Since AIG just paid out $1 million in bonuses to 73 employees, Dodd’s version limiting all employees to what the President made (roughly $500,000) would have substantially nipped that in the bud.
From the final conference version of the bill:
(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.
So — in the end, all compensation limits only applied to contracts written after February 11, at the specific request of Timothy Geithner, and AIG was able to pay out $286 million in bonuses on Sunday.
It’s impossible to know how many of those bonuses would have been covered by Dodd’s original language without examining the individual contracts. What is certain, however, is that the loophole regarding "retroactivity" which facilitated the payout of the bonuses that AIG cited in their white paper, was something that Treasury specifically lobbied for. For the "administration official" to blame Dodd in the pages of the New York Times for the payout of these bonuses, after the White House publicly fought him tooth and nail to weaken compensation limits, is completely disingenuous.
Update: Glenn Greenwald has more, and seems to have gotten several news outlets to change their stories to conform with what actually happened.