Wall Street titans prepare to feel the pain

Hank Paulson, US Treasury secretary, on Wednesday acknowledged that his ­proposed $700bn bailout of Wall Street would have to take aim at executive pay, bending to political anger in Congress.

By abandoning his previous assertion that congressionally-mandated curbs on executive compensation would make the bailout less effective, Mr Paulson handed Washington lawmakers their first scalp – Wall Street bankers.

"We must find a way to address this in legislation but without undermining the effectiveness of this programme," he said.

At a hearing on Tuesday, Christopher Dodd, the chairman of the Senate banking committee, categorically stated that the administration should "count on" ­executive pay being a part of any legislation approved by the Democratic-controlled Congress.

Democrats are not the only ones who have called for Wall Street titans to feel some personal pain. Republicans on Capitol Hill, who would otherwise be loath to agree to any federally-mandated limits on executive pay, have been quick to embrace the idea. Both presidential candidates have endorsed as-of-yet-vague proposals that would limit how much executives at bailed out firms could earn.

"It's wrong to ask teachers, farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons," John McCain, Republican presidential candidate, said on Tuesday. "The senior leaders of any firm that is bailed out should not be making more than the highest-paid ­government official."

A draft proposal from Mr Dodd would give the US Treasury the power to ban "inappropriate or excessive" payments. It would also install a so-called "clawback" provision that would require executives to give up benefits if results were shown to have been overstated. Proposals circulating in the House would give shareholders a vote on pay.

Most Washington insiders agree that, in the long run, the administration will concede the fight to shore up some political capital for more important battles.

"The reason the administration ultimately gives in is because this is not a universal, all-encompassing limit on executive pay. The bailout itself is time-limited," one congressional aide said. "It's not going to make ­everyone happy that has been pushing for [extensive] reform – not by a long shot."

But some reform – however limited – could give political momentum to advocates for broader changes in US-style executive pay down the road, the aide added.

Business lobbyists privately acknowledge there is no way to stop the congressional tide – there are no effective arguments they can make, given taxpayer funds are at risk. Mr Paulson's previous stance – that fewer executives might join the programme if their pay was limited – was eviscerated by Barney Frank, the chairman of the House financial services committee, who described such behaviour as "selfish and unpatriotic".

Bruce Josten, the senior lobbyist at the US Chamber of Commerce, said he accepted some limits on pay would be approved but pointed to risks in the plan.

"Think about it this way; Paulson gives your bank ­billions to clean up the mess – do we want the guy who is taking care of that earning $50,000 a year? We want the best and brightest."

One banking lobbyist said, in hindsight, Wall Street chief executives might have done themselves a favour by pre-empting Congress and agreeing to pay themselves $1 next year.

"Now they look like they are being punished?.?.?.?and then when guys start quitting, they are going to look like real babies."

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