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January 27, 2009


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A question and an observation. First, normative claims aside, as a legal matter, does Geithner have authority to require such a check? and if not, would BoA's management be liable for breach of its duty of care (and such action be void as waste of corporate assets) were it to comply?

Second, many US Corporations paid cash bonuses prior to Jan 1, 2009. The reason that they did so is because Jan 1, 2009 marked the onset of a new executive compensation regime under Section 409A of the Internal Revenue Code (Jan 1, 2009 was set as the effective date by the Treasury two years ago, before the current crisis was on the horizon). Executives had contracts with their corporate employers that were established years before the new regime was formulated - and to commute those contracts into 409A compliant compensation arrangements, the non-compliant portions were cash settled (as they would be if the corporation chose to breach the contracts and the breach was taken to court where expectation damages would be awarded, except that in this latter case, more public resources would be devoted to the tussle between employers and management). While any one of the negotiations, including Merrill's, leading to the recent lump sum cash outs may have involved other considerations - in criticizing these cash outs it is important to recognize that many are not "bonuses" but settlements of executives' contractual rights that were spurred on by a federally imposed deadline that had been set in October 2007 by IRS Notice 2007-86.

Alex Geisinger


Nice post. Excuse the pun but I think you're right on the money. Just one quick question. Does the money have to come back out of returned bonuses? On the one hand, writing a check, regardless of the source of funds, would signal that BoA understands what it did was "wrong". On the other hand, if the check is written on other BoA funds isn't it at some level simply returning tarp money back to the government?

Bernard Harcourt

Sorry for the delay in responding, there’s a steep learning curve on this blogging!

Thanks for your two questions, Alex. Regarding the first, the $4 billion check that Bank of America should write to the Treasury need not come out of returned bonuses. I think that is a matter of internal governance and ultimately up to the shareholders. I would add, though, that as a shareholder – recall, we (the United States) are now the biggest shareholders of BoA, with about 6% of their equity – I would favor getting the bonus money back.

If they do not get the bonus money back, then yes, indeed, they are simply returning other TARP moneys. What that will mean is that they will probably need to return to the trough sooner than expected. At that point, though, they will have shown a modicum of good faith and we should be willing to consider their request. Barring the refund, I would say they are no longer eligible for TARP moneys.

In response to your first question, IB -- “does Geithner have authority to require such a check?” -- it is not clear that Geithner has the legal authority under TARP to compel BoA to return the funds. Senator Dodd has said that he wants the Treasury to find a way to legally require the banks to refund the bonuses, but it is not clear that there is a legal vehicle under TARP. There is ongoing debate about that.

But legal authority that is not really the issue, right? BoA is going to need more TARP money. Geithner is the one who ultimately decides. Connect the dots and we’re all set: Geithner just needs to pick up the phone and say “pony up the money.” He could add “if you know what is good for you.”

As for your second question – “would BoA's management be liable for breach of its duty of care (and such action be void as waste of corporate assets) were it to comply (and return the $4 billion to the treasury)?” – it strikes me that they have a lot more to fear right now from class action shareholder suits over the payment of those bonuses. (And, lest we forget, we – the United States – are the biggest shareholders of BoA. As shareholders, I think we should consider suing the bank for breach of duty of care).

Finally, there have indeed been many sophisticated justifications for the bonuses – taxes, compensation, etc. Those are all red herrings – cute, but beside the point. The central point is this: These managers ran Merrill Lynch into the ground. Merrill Lynch was bankrupt. Merrill Lynch laid off tens of thousands of employees. Merrill Lynch reported losses of $27 billion. I’m not sure that those managers should have received any compensation – let alone a bonus.

Mark carpanini

When powers are delegated to the Executive Branch without any discernible guidelines, criteria, standards, principles, etc., this is what you get. The TARP is as good an example of why the the Court needs to revisit Chevron as you will find.

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