WASHINGTON — Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.
But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.
Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.
“The flimsy executive-compensation restrictions in the original bill are now all but gone,” said Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee.
The modification reflects how the rapidly shifting nature of the crisis and the government’s response to it have led to unexpected results that are just now beginning to be understood.
The Government Accountability Office, the investigative arm of Congress, issued a critical report last week about the rescue package that said it was unclear how the Treasury would determine whether banks were following the executive-compensation rules.
Michele Davis, spokeswoman for the Treasury, said the agency is working to develop a policy for how it will enforce the executive-compensation rules.
If a firm violates the executive-compensation limits, department officials said, the Treasury could seek damages, go to court to force compliance, or even rescind the contracts and recover the bailout money.
“We therefore have all the remedies available to us for a breach of contract,” Davis wrote in an e-mail.
Legal experts said those efforts could be complicated if the Treasury outlines the penalties after companies have received bailout money. David Lynn, former chief counsel of the Securities and Exchange Commission’s division of corporation finance, said courts have sometimes placed limits on the government’s ability to impose penalties if there was no fair warning.
