Administration Seeks Increase in Oversight of Executive Pay
WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.
The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.
Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.
It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.
The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.
The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.
One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.
The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.
During the presidential campaign, Mr. Obama repeatedly urged regulators to adopt new rules to give shareholders a greater voice in setting executive pay for all public companies. And last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses that exceeded one-third of their annual pay.
The regulatory plan is being put together ahead of the meeting of the Group of 20 industrialized and developing nations in London. The meeting, which begins April 2, is expected to be dominated by the global financial crisis and discussions about better oversight of large financial companies, whose problems could threaten to undermine international markets.
An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis.
Officials said the plan would also call for increasing the levels of capital that financial institutions need to hold to absorb possible losses. In a sign of the economic system’s fragility, officials said the administration would emphasize that those heightened standards should not be imposed now because they could discourage more lending. Rather, they would be put in place after the economy began to rebound.
“The argument some are making is that they don’t want to be stepping on the gas pedal and the brake at the same time,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics and a former top official at the International Monetary Fund.
Administration officials are also debating how tightly to supervise hedge funds.
A broad consensus has emerged among regulators and administration officials that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission. But officials have not decided how much the funds will have to disclose about their investments and trading practices. The officials spoke on condition of anonymity because the regulatory plan was still being formulated and they did not want to upstage Mr. Obama or Treasury Secretary Timothy F. Geithner, who will describe the plan when he appears before Congress on Thursday.
A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds.
That proposal would, for instance, make it easier for the government to cancel bonus contracts like those given to executives at the American International Group, which have stoked a political furor. Under the proposal, the Treasury secretary would have the authority to seize and wind down a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board.
Long before he became Treasury secretary, Mr. Geithner sought broader authority for the government to resolve problems at financial institutions not under bank regulators’ supervision.
The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company — a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward.
In unveiling the regulatory plan, Mr. Obama would signal to Europe that he intended to crack down on the risk-taking and other free-wheeling practices by the financial industry that resulted in the global economic meltdown.
France and Germany especially have suggested that the better response is not more government spending but tighter regulation.
The Obama administration has urged European nations to do more to restart their economies through financial stimulus. Mr. Obama is hoping that by showing a serious commitment to tighter regulation he can more easily persuade other countries to increase government spending and stimulate demand by consumers and businesses that would help pull the global economy out of a serious decline.
But the administration’s efforts, especially on tighter regulation of hedge funds, are not expected to assuage some European countries. Moreover, the hedge fund industry has significant influence on Capitol Hill and has shown that it can defeat proposals it finds onerous.
While a growing number of hedge fund advisers have voluntarily agreed to register with the S.E.C., many of the most prominent ones are expected to oppose efforts to require them to provide what they consider proprietary information about their holdings and trading practices, even on a confidential basis.
From the outset of the Obama administration, officials and European leaders have disagreed over how much to limit pay. And Mr. Geithner has discouraged the administration from imposing across-the-board limits on compensation of all employees at troubled companies receiving federal assistance and more burdensome pay restrictions at healthy institutions that the administration is trying to encourage to take government money so they can increase lending.
Last week, Ben S. Bernanke, the Fed chairman, also called on regulators to supervise executive pay at banks more closely to avoid “compensation practices that can create mismatches between the rewards and risks borne by institutions or their managers.” Much of the plan would require the approval of Congress, where divisions are forming over how best to overhaul financial industry oversight.
Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, said he believed giving the government new authority to take over troubled companies could be adopted by the House relatively quickly, particularly after the furor over the A.I.G. bonuses.
“This would give the government the same powers that you would get as if the company were in bankruptcy,” Mr. Frank said in an interview shortly after meeting with Mr. Geithner on the plan.
But Mr. Frank and other lawmakers said other elements of the plan could take more time, like expanding the authority of the Federal Reserve to become a systemic regulator.
In a hearing Thursday, Senator Christopher J. Dodd, a Connecticut Democrat who is chairman of the banking committee, expressed skepticism about that proposal. “Whether or not those vast powers will reside at the Fed remains an open question,” said Mr. Dodd, pointing out that the Federal Reserve had failed to apply tough oversight of the companies it now regulates.
Landon Thomas Jr. contributed reporting from London.
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