Bankers Press Case Against Punitive Tax

WASHINGTON " An alarmed banking industry looked for friends in Washington Friday as it tried to head off severe Congressional restrictions on compensation, fearful that a wave of popular anger about vast paydays will result in permanent damage to the industry.

After a week of unexpected setbacks for an industry accustomed to deference, bank executives said they were now racing to convince Congress and the Obama administration that imposing punitive taxes on bonuses would unfairly punish thousands of people for the sins of a few. Executives also argued that hitting banks would hurt the broader economy.

"We are working in every appropriate way with policymakers in Washington, and with other financial institutions and industry associations, to come to agreement on a constructive industry compensation system that is good for the company, the financial system and the country," Citigroup chief executive Vikram Pandit said in a memo sent to employees.

The stakes are especially high because the Treasury Department is moving ahead with a critical initiative that involves persuading private investors to buy troubled assets from banks. The administration, which could unveil more details of this plan as early as Monday, is deeply worried that investors will be afraid to participate, Treasury officials say.

Congress remained at a fever pitch, with several members issuing new demands that various companies rescind various bonuses. Long-simmering anger about lavish paydays on Wall Street has erupted since the disclosure last weekend that American International Group, bailed out by the government, still had paid $165 million in new bonuses to the company's most troubled division.

But there were signs that others in official Washington were more sympathetic to industry concerns. Two of the nation's senior banking regulators indicated in speeches that compensation should be tied to performance, the point of bonuses.

Federal Reserve Chairman Ben Bernanke said banks should structure compensation to reflect contributions to a company's health and profitability. He said problems arose when employees were rewarded for short-term results that created long-term risks.

"Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization," Bernanke said in a speech to the Independent Community Bankers of America.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., speaking Friday to the same group, said that some bankers deserved to be paid more depending on performance.

The Obama administration continued to offer measured comments. An official said that the White House will seek to recover the bonus payments from AIG, but in a manner that does not threaten the financial system.

"The president has said repeatedly that he will do everything possible to recoup these bonuses " it is not a matter of if he is in favor of it, but how and what the best vehicle is," the official said.

Many bank employees, particularly those who work in the capital markets and investment banking, get the majority of their annual compensation in the form of a lump-sum payment at year's end, a practice that is designed to tie pay to performance.

The bill passed by the House on Thursday would eliminate those bonuses for thousands of workers at eight of the largest U.S. banks, in addition to employees of AIG, Fannie Mae and Freddie Mac. It would slap a 90 percent tax on bonuses to employees with incomes above $125,000, or household incomes above $250,000.

A broader Senate bill, which could reach the floor next week, would also tax thousands of bonus recipients at regional banks.

The rapid progress of the legislation surprised many in the financial industry, triggering widespread panic. The measures are retroactive, and many employees have spent some of the money, which they might now be required to repay. There was also alarm at the Treasury, where some officials fear that the ferment on Capitol Hill will damage the government's ability to partner with financial firms on economic recovery.

The program to buy toxic assets would involved three components, sources said. The plan would establish an entity, backed by the Federal Deposit Insurance Corp., to buy loans from banks, a source familiar with the matter said. The idea is rooted in what some market analysts and regulators call a "bad" bank.

Treasury and Federal Reserve officials are also preparing to partner with private investors to create funds that could buy toxic assets, which provided the financing for troubled loans such as mortgages and have been at the heart of the banking system's troubles. The funds would borrow money at favorable rates from the Fed " without having to pay back the loans for at least five years and possibly as long as seven years " to buy the assets, freeing banks to lend once again, a source said.

Finally, the Treasury and Federal Reserve would expand a recently-launched program that provides financing to private investors to buy assets that back new consumer loans, such as credit card debt, student loans and auto loans. That initiative would be broadened to address toxic assets that have been sitting on the books of banks for months, not just new ones.

Several of the nation's leading bankers Friday tried to comfort their employees.

Jamie Dimon, chief executive of J.P. Morgan Chase, held a conference call with senior executives to emphasize their value, and to tell them that the company was working to convey its concerns to the government.

Bank of America chief executive Kenneth Lewis told employees in a memo that they deserved to keep their pay.

Pandit of Citigroup raised another common theme, arguing that most of those responsible for the bank's mistakes in recent years had left the company, and that the remaining employees were playing a key role in helping the nation to recover.

"You have been invaluable in our collective efforts to put the company on solid footing," Pandit wrote. "The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees."