Asset managers that participate in the Public Private Investment Program (PPIP) with the US Treasury will probably be exempt from executive compensation limits imposed on private entities that have accepted government bail-out funds, Treasury secretary Timothy Geithner has said.
Speaking before a meeting of the Congressional Oversight Panel (COP), Geithner told committee members the Treasury is completing a draft consultation paper on the implementation of government restrictions for PPIP participants and said the paper will be released for comment within a matter of weeks.
"We're going to apply the law, [but] you'll see in the rule how we propose to strike the balance [between executive compensation limits and the participation of private enterprise in the PPIP]. But it is my judgement those compensation restrictions do not need to apply to these programmes," said Geithner.
Yesterday's meeting was the Treasury secretary's first appearance before the COP, a body established in October 2008 alongside the passing of the $700 billion Troubled Assets Relief Program (Tarp) bill, to review the current state of financial markets and the US regulatory system.
Geithner said the results of stress tests to determine whether additional capital is required by systemically important banks should be announced "within the next few weeks", although he had to defend the decision to make the information public when senator John Sununu questioned why the Treasury would release such details "when bank examiners do not publically disclose their specific findings regarding banks that they examine".
Geithner defended the decision, claiming that transparency and disclosure around potential losses on bank balance sheets is "essential to allow banks to raise capital. Otherwise they will live under a bigger cloud of uncertainty about their financial health longer than they need to".
Panel members took full advantage of their first opportunity to grill Geithner. Republican Jeb Hensarling asked whether the Treasury would permit banks to repay Tarp funds as and when they wish, or whether federal regulators would ultimately decide whether such reimbursement would take place. Geithner said he would welcome repayment efforts, but federal regulators will have the final say in assessing whether the relinquishing of funds by one institution would be good for the US financial system as a whole.
In one exchange, committee member Damon Silvers, associate general counsel for the American Federation of Labor and Congress of Industrial Organizations, attacked the architecture of the PPIP, citing a "profound and inexplicable imbalance between public capital and public risk, and private capital and private gain".
"In the legacy securities programme, we have the fantastic amount of 33% of capital from the private sector and 50% of the gain going to the private sector. In the legacy loans programme, the amount of private capital is 7%, but the potential gain to the private sector is 50%. If the assets these partnerships buy don't turn out to be worth the price paid, if we eat through the equity in those partnerships, is it not the case that the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve are on the hook [for losses]?" Silvers demanded.
Geithner conceded that is the case, but highlighted the role private capital will play in absorbing losses before FDIC funds as evidence that taxpayers are being protected and the scheme will benefit from private sector price discovery.
"The alternative model, where the government sets the price for the assets, leaves the taxpayer at acute risk of overpaying, and although it has all the upside potential, it also has all the downside risk too. This method is a trade-off where the taxpayer is taking on at outset a much greater share of losses across the financial system," Geithner claimed.
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