UPDATE: Feinberg: Unfair To Ask Firms To Return $1.6 Billion In Misguided Payouts

U.S. "pay czar" Kenneth Feinberg on Friday declined to seek repayment from 17 financial firms that doled out $1.6 billion in "ill advised" executive compensation during the height of the financial crisis, saying to do so would be unfair to the companies and could trigger private lawsuits and additional Congressional investigation.

Feinberg announced Friday that he had found 17 firms--including Goldman Sachs (GS), J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C)--made inappropriate bonus-like payouts to top executives in late 2008 and early 2009 even as the companies were receiving taxpayer assistance. Feinberg, the Obama administration's special master for compensation, said he targeted this pool of payments both for the sheer amount--some individual payouts exceed $10 million, he said--and the lack of reasonable rationale for their payment.

Other firms Feinberg criticized for poor judgment included: American Express Co. (AXP), American International Group (AIG) Bank of America Corp. (BAC), Boston Private Financial Holdings Inc. (BPFH), Capital One Financial Corp. (COF), CIT Group Inc. (CIT), M&T Bank Corp. (MTB), Regions Financial Corp. (RF), Sun Trust Banks Inc. (STI), Bank of New York Mellon Corp. (BK), Morgan Stanley (MS), PNC Financial Services Group (PNC), U.S. Bancorp (USB) and Wells Fargo (WFC).

But he stopped short of saying any of the firms violated the public interest, the highest censure allowed by the law mandating his review. None of the firms violated any law or regulation when they made the payouts, Feinberg told reporters during a briefing Friday. His study covered the five-month window during which firms were getting government assistance but policymakers had not yet enacted executive compensation restrictions. Those rules came into force in early February 2009.

The payments "were ill advised, they were troublesome. But I do not believe it is fair to declare ... that the payments were 'contrary to the public interest,'" he said. In fact, Feinberg said he undertook the compensation review, which was required by the 2009 stimulus law, with "some reluctance."

"This is arm-chair quarterbacking," he said.

Feinberg also said he felt it was inappropriate for him to ask any of the 17 firms to claw back or reimburse taxpayers for the bonus payouts. Under the law he has no authority to demand repayment, but Congress did direct him to request reimbursement if appropriate.

Nonetheless, Feinberg felt these payouts were misguided enough to push the firms to adopt a policy that would limit their ability to pay out large sums during the next crisis. This so-called "break provision," would be triggered by a decision of the company's board of directors that the firm was in a crisis situation. It would then enable a company's compensation committee to restructure, reduce or cancel pending executive payouts.

It remains unclear if any of the 17 firms will actually adopt Feinberg's recommendations. The proposal is voluntary, and the government's influence over many of the cited firms has waned. Eleven of the 17 firms have fully repaid taxpayers.

But Feinberg, who has discussed his proposal with each of the 17 firms cited by his report, said he is "hopeful" the firms will comply. "I have not heard much pushback."

The study is the result of four months spent reviewing pay at 419 firms that took government money during the crisis. The task was in addition to Feinberg's core assignment to review pay at a handful of firms that received "extraordinary" assistance from the government.

Feinberg narrowed his study to "highly compensated employees" with annual pay packages of more than $500,000 that received payments that were later curbed by Congress and Treasury, including cash bonuses, retention rewards, stock grants and golden parachutes.

-By Victoria McGrane, Dow Jones Newswires; 202-862-9267; victoria.mcgrane@dowjones.com.

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