The White House unveiled the outlines of its new ground rules for the financial game Wednesday, but seemed resigned to leave the same failed players on the field. That could change, however, if some members of Congress get their way.
"The main thing is that not a single person has been held accountable for the destruction of multibillion-dollar businesses, and that's disturbing. We have to learn from our mistakes," Rep. Alan Grayson (D-Fla.) told the Huffington Post. "Letting the people who destroyed these huge institutions continue to function in the financial industry is like giving a gun to my four-year-old child. A loaded gun."
Grayson is spearheading a push for accountability from executives and boards of directors who led companies that have relied on TARP funds to survive. One possibility for action, which has gained some steam since last week's House hearings on executive compensation, is the use of civil injunctions to bar individuals from serving as officers or directors at any public company, sometimes for life.
The Securities and Exchange Commission typically levies such bans against corporate officers, investment bankers or stockbrokers convicted of fraud and deemed "unfit to serve." When it comes to the collapse of the financial sector, this doesn't necessarily apply. But a some financial-regulatory experts are suggesting that a modified approach could be used to bar TARP-recipient executives and boards of directors, based on a standard of negligence.
"I think it's doable to say there's a certain point of negligence beyond which we will not let them serve again," said Nell Minow of The Corporate Library, an independent corporate-governance research firm. "I consider this simply somebody who has demonstrated unfitness for the job not being allowed to be in it."
The litmus test for negligence and "fitness" shouldn't necessarily apply to all public companies, Minow said, but she would have instituted it as a condition of the TARP banks taking taxpayer money last fall.
Harvey Pitt, who chaired the SEC from 2001-'03, said Congress should have no trouble doing just that, should legislators desire. "If the government is going to give funds to companies, it presumably has the right to condition the award of those funds on whatever terms it thinks appropriate," he said. "This strikes me as a solution in search of a problem."
Pitt cautioned, however, that granting the SEC authority to bar officers and directors based on negligence would require clear standards subject to judicial review. Blanket bans have unintended consequences, after all, especially given the interconnected nature of corporate America, noted Columbia Law School professor and securities-regulation expert John Coffee.
"I think a prophylactic ban is too strong," Coffee said. "Suppose we have General Motors fail, and we have 15 directors there, many who are on the major corporations around the country. What if one of them was the CEO of IBM? Would you tell him he can't serve in his role as the CEO of IBM because he was on the board of General Motors when it failed?"
Proposed legislation featuring bans from industry is likely to face strong opposition in the House, including from powerful Financial Services Committee chairman Barney Frank. Frank called the idea "wacky," noting that some TARP recipients were urged by then-Treasury Secretary Hank Paulson to take the federal money. "Why does that mean they're unfit to serve, if they were forced to take TARP funds, didn't want it and paid it back?" Frank asked the Huffington Post. "I am not for treating people who have not committed fraud as if they committed fraud."
A more moderate solution could focus on cutting or reclaiming compensation from an executive who accrued short-term risk that handed the company a long-term loss. Coffee cited Citigroup's asset-backed securitization group as an example where executives should have been forced to return their pay, but said any such clawback measure should be attached to triggers like ratings downgrades or major stock losses.
Another way to strengthen accountability could be to enhance the role of shareholders in seating directors or vetoing officers. Minow said that shareholder votes, or at least more transparency in the appointment process, are essential to reform executive cronyism that can often run rampant.
"It seems to me that you could have standards for serving on a board," Minow said, citing one board's provision that conviction of a felony was not grounds for its CEO's termination. "A director from Enron still continues to serve on boards. When I first started working in the field, O.J. Simpson was on five boards, including an audit committee ... I don't want to sound cynical, but I just feel, after observing this process for 20 years, the only thing that makes any difference is replacing board members."
Still, the core problem is ensuring transparency and accountability, said Grayson, citing further hearings and systemic-risk regulation as steps in the right direction on the legislative side, where he said the fight belongs.
Spokesmen from the SEC and the Securities Industry and Financial Markets Association declined to comment unless there was draft legislation on the table.
Whatever solution results, people will be watching, Grayson said. A YouTube video of Grayson demanding TARP transparency from Federal Reserve Inspector General Elizabeth Coleman has garnered more than 1.2 million views since January, and he said he still regularly hears feedback from constituents on the subject.
"Make heads roll. That's the suggestion I hear most often," he said. "Make heads roll."