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Obama to Unveil CEO Pay Plan, 'Bad Bank' Delayed

Sunday, 1 Feb 2009 | 10:05 PM ET

The Obama administration will not unveil new measures to aid the financial services industry this week as had been expected. Instead the issue of Wall Street bonuses and executive compensation will be addressed, an industry source says.

An industry aid package, including the creation of a "bad bank" concept, will be announced next week, said the source, who is familiar with a weekend's worth of discussions between government officials and representatives of the financial services industry.

The Obama administration and those people have been discussing a number of measures and issues on a concentrated basis since Friday, when speculation first arose that any policy initiative on a bad bank would be delayed.

Though details of the intended Obama administration announcement on Wall Street compensation are unknown at this time, it will be executed through the TARP plan, meaning it will address limits on pay for those firms receiving government assistance, as both Congressional Democrats and senior White House advisors have urged in recent weeks.

Toward the end of the week, President Obama chastised Wall Street firms for handing our large executive bonuses, while petitioning for government assistance and in some cases struggling to survive, calling the situation “shameful” and "outrageous." Congress is now also seriously considering legislation capping executive compensation.

In his weekly radio address Saturday, the President said new initiatives would make sure chief executives "are not draining funds" from their firms that might otherwise be spent on fueling an economic recovery, through loans and other instruments.

In seeking Congressional authorization of the final $350 billion of the TARP plan, the Obama administration said it wanted to have "potential ammunition" for the financial sector but also made it clear it would seek tougher conditions on participating firms, mirroring legislation crafted by Rep. Barney Frank (D.-Mass.), the chairman of the powerful House Financial Services Committee.

New terms on executive compensation as well as lending transparency for firms participating in the government bailout were part of the talks with industry members Sunday.

Those talks also centered on a group of options that the Obama administration is considering to provide aid to the financial sector. They include a "bad bank" concept to buy toxic assets from firms, as well as more capital injections and a so-called "ring fence" concept, in which the government uses a combination of guarantees and insurance to cover bad assets within an institution without technically removing them from the balance sheet.

Though the massive stimulus package has clearly been the White House’s chief focus in the early days of the new administration, President Obama has been pressed to consider additional ways to support the still-struggling financial system.

At the same time, negative publicity about large bonuses for Wall Street executives amid the financial sector meltdown and massive amounts of federal aid has ignited government and taxpayer indignation.

In addition, Congressional Democrats have been crying foul over former Treasury Secretary Henry Paulson’s administration of the TARP, saying it was both too generous and lenient on Wall Street firms receiving aid. In mid-January, Rep. Frank introduced legislation revising the TARP, which included tougher terms on both executive pay and lending practices.

Democratic Sen. Claire McCaskill of Missouri Friday proposed a cap on total compensation of $400,000 a year on executives, until their companies no longer rely on government aid.

The latest outcry over executive pay happens to coincide with a growing consensus that the financial services industry will need more government aid amid a worsening economy and seemingly malignant credit crunch.

The concept of a government-run entity that would buy the troubled assets of private sector firms to help clean up their balance sheets has gained considerable momentum since Federal Reserve Chairman Ben Bernanke mentioned it prominently in a major about two weeks ago.

But like an earlier auction-based plan conceived — and then dropped — by Paulson, it’s viability has been undermined by questions about how the assets would be valued.

Analysts and industry executives alike also say it is hardly a cure all.

They say some institutions may be better served by the “ring fence” concept, which the Fed and FDIC recently instituted at Citigroup and Bank of America.

Still others say more capital injections are needed, either for a first or second time at some institutions.

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