Regulation

BoA’s Ken Lewis: Pay Caps Could Push TARP Exit

The unintended positive consequences of curbs on executive compensation.
David KatzMarch 3, 2009

The curbs on executive pay in the new economic stimulus law are a strong incentive for Bank of America to pay back the funds it’s been lent under the Troubled Asset Relief Program, Kenneth Lewis, the bank’s executive chairman and chief executive officer told a group of editors from The Economist and CFO this morning.

While BoA’s top management feels a sense of loyalty to each other and the corporation — and thus would be likely to stay with the bank — the fact that the curbs apply to the next 20 most highly compensated employees goes too far, Lewis said.

Some employees below the top management level might be among the company’s top producers, and restrictions on their pay may make them susceptible to offers by foreign companies, Lewis said, suggesting that could hurt a U.S. bank’s profits.

Under the $787 billion economic stimulus bill signed by President Obama last month, companies that take more than $500 million from TARP are required to curb compensation for the top five most highly paid executives and the 20 highest paid employees.

On the broader question of who should be blamed for the financial meltdown, Lewis was asked if bank boards of directors were responsible because they had not asked the right questions. The bank CEO answered that it was the senior managements of banks that should take the brunt of the blame, not the boards. Board members asked good questions, he said, but senior management provided answers based on faulty models.

Top bank executives relied too much on historically based models that failed to account for unanticipated events, according to Lewis, who noted that the banks failed to test the models enough for the effects of unorthodox situations. BoA and other banks also relied too much on hedging to manage risk, he added.

Another participant at the briefing, Joe Price, the bank’s CFO, added that the downward deviation in home prices should have forced banking executives like him and Lewis to look more closely at what the consequences for lenders might be.

Price suggested that in the wake of the crisis, the bank’s aim was to offer simpler, more transparent products. The finance chief was asked if that tendency would impinge on commercial customers’ ability to hedge their risks. His answer: The products that the bank would cut back on would be highly complex securitizations sold mainly to investors, not the hedging products finance executives use to manage corporate risk. (Additional reporting by Vince Ryan and S.L. Mintz.)