Sarkozy Threat to Shun Banks on Pay Draws U.S. Alarm (Update2)

by Michael J. Moore and Mark Deen
Aug. 26 (Bloomberg) -- French President Nicolas Sarkozy’s plan to shun bankers who don’t accept pay limits was met with alarm by analysts and investors in the U.S., where Citigroup Inc. and six other bailed-out companies are being grilled by the government on how they compensate top-paid executives.
"I find Sarkozy’s statements threatening," said Bruce Foerster, president of South Beach Capital Markets in Miami and a former Lehman Brothers Holdings Inc. executive.
France won’t hire financial firms unless they apply rules agreed to by French bankers that include a three-year deferral on two-thirds of bonus payments, Sarkozy said yesterday. He aims to bring his proposals to the Group of 20 summit in Pittsburgh next month, which President Barack Obama is scheduled to attend.
Sarkozy is "coming to Pittsburgh and is going to be whispering in the ear of a president who has shown some willingness to listen to that kind of thinking," Foerster said.
"President Obama has made a lot of scathing comments about banks and bankers’ compensation."
Obama has asked his "special master" on pay, Kenneth Feinberg, to establish pay guidelines for executives at the rescued companies, which also include Bank of America Corp. and General Motors Co. The measures aim to reduce incentives that led executives to take excessive risks and to quell a political outcry over bonuses paid at American International Group Inc., whose compensation practices are also under review by Feinberg, who didn’t return a call for comment yesterday.

Contracts Revised

White House spokesman Tommy Vietor declined to comment.
The looming rulings from Feinberg, who has about two months to respond to the pay proposals, have prompted companies including Bank of America and Citigroup to add clauses into some new employment contracts stating that some compensation may be subject to government approval or limitations, according to a person familiar with the contracts.
"This is a good way for the corporation to save face if it’s challenged by the government, being able to say we looked into this and took this into consideration," said Thomas B.
Lewis, a lawyer at Stark & Stark in Princeton, New Jersey.
"It’s probably only going to come into play with the very high- wage earners."

Bonus in Shares

In France, institutions including BNP Paribas SA and Societe Generale SA agreed to the deferral and promised to pay out a third of bonuses in shares. They also pledged to stop offering guaranteed payouts to new hires.
Sarkozy said he wants the G-20 to consider capping the total amount paid out by banks in bonuses and to consider setting limits on the size of individual bonuses. The meeting in Pittsburgh follows one held in London in April, when the group promised tighter rules on pay for bankers.
"I will fight in Pittsburgh to amplify the commitments made in London," Sarkozy said. "The problem is global and has to be treated globally. France won’t accept the most minimal position or wait to act."
Sarkozy’s demands will be difficult to enforce globally, said Charles Geisst, a professor of economics and finance at Manhattan College and author of "Wall Street: A History."
"It’s an interesting remark," Geisst said. "I sort of take that on the shady side of the street, as a political comment."

French ‘Example’

Sarkozy says he wants France to "set an example" on banker pay. That means applying political pressure on leaders such as U.K. Prime Minister Gordon Brown and President Obama to follow suit.
"If they refuse to do the same thing as us, they’ll have to explain it to their citizens," said Rene Ricol, who Sarkozy made an ombudsman last year to ensure the banks keep lending.
Almost 8 in 10 Britons criticized proposals by the Financial Services Authority to restrict pay, a poll by YouGov Plc showed.
"We’ll be the first to do this," Finance Minister Christine Lagarde said today on RMC radio. "If we don’t take the initiative, no one will."
Sarkozy’s government, which plans a record 155 billion euros ($216 billion) of debt sales this year, regularly hires foreign banks to sell bonds and arrange other transactions.
France hired Barclays Plc and HSBC Holdings Plc to help manage its only syndicated bond issue this year, a 6 billion- euro offering of 30-year notes on June 23, according to data compiled by Bloomberg. The deal was also managed by BNP Paribas, Credit Suisse Group AG and Societe Generale.
"This is demagoguery run amok," said Michael Holland, who oversees more than $4 billion at Holland & Co. in New York. "If the best and most qualified bankers go to places where they are compensated for their work, it means that Sarkozy will be doing business with only those that don’t have the highest degree of excellence."