Daniel Gross says the threat of restrictions on how much executives can be paid has motivated banks subject to the limits to "get their houses in order":
It's Payback Time!, by Daniel Gross: One of the main criticisms of the massive bank bailouts was that the Feds didn't get sufficiently medieval on bank shareholders, including top executives who owned big chunks of stock. ... And yet, by design or dumb luck, it turns out that the government did have one powerful stick that has pushed banks and their shareholders to reform themselves sooner rather than later: the ability to regulate banks' compensation. ...
From the outset, healthy banks were eager to get out from under the TARP because they wanted to avoid discussions about appropriate levels of executive compensation. The investment banks that were capable of paying back did so in June, the month when lawyer Kenneth Feinberg was appointed as TARP's special master for executive compensation. Coincidence?
In October, Feinberg issued compensation guidelines for the companies receiving special assistance... That, and the approach of the bonus season, lit a fire under executives at the largest remaining TARP recipients. ... They cut costs, shrank their balance sheets, and raised capital from new investors.
Look what's happened in the past two weeks. First, Bank of America agreed to pay back $45 billion in TARP funds. Bank of America found that the pay restrictions were complicating the search for a new boss to replace Ken Lewis. It raised $20 billion from the public and agreed to sell $3 billion in assets. The smaller, leaner, better-capitalized bank was able to hire a new CEO on Wednesday.
Citigroup ... also sprang into action. Earlier this week, it announced it would pay back $20 billion in TARP funds... Citi raised $20.5 billion of capital, said it would give employees $1.7 billion in stock rather than cash for bonuses. Once the money was paid back to the Treasury, Citi noted, "it will no longer be deemed to be a beneficiary of ... TARP..." Translation: Ken Feinberg won't be allowed to tell us how much to pay our folks. Because of its desire to get out from under such scrutiny, Citi has aggressively cut costs (by $15 billion annually), shed assets, and vastly improved its capital position. ...
Also this week, Wells Fargo announced it would repay $25 billion in TARP funds by selling $10.4 billion of stock and selling off assets. It, too, will be a smaller, leaner, better-capitalized bank.
Among the three, that's $90 billion in repayments to the taxpayers in a week and more than $50 billion raised from the public. Of course, these offerings came at a cost. The banks essentially created new shares... They diluted existing shareholders, which is what is supposed to happen when companies suffer losses and need to raise capital. And because of these offerings, future earnings will be spread across a much larger share base. As ... much as anything else, the threat of the government having limiting bankers' compensation spurred the banks to get their houses in order.