2nd UPDATE:Feinberg Won't Ask Firms To Return $1.6 Billion In 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 Group Inc. (GS), J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C)--made inappropriate bonuslike 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 as having poor judgment included American Express Co. (AXP), American International Group Inc. (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), SunTrust Banks Inc. (STI), Bank of New York Mellon Corp. (BK), Morgan Stanley (MS), PNC Financial Services Group Inc. (PNC), U.S. Bancorp (USB) and Wells Fargo & Co. (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.

Feinberg's decision to hold back on that front likely caused Wall Street to breathe a collective sigh of relief after enduring months of bonus-driven anger by the public and Congress.

"His report clarifies that the payments were within the public interest," said Scott Talbott, a top lobbyist for the Financial Services Roundtable, which represents several of the financial firms on Feinberg's list.

Feinberg seemed reluctant to stir up more controversy over bonuses paid out nearly two years ago. Had he deemed the payouts violated the public interest, he said, there would have been a "huge threat" of private lawsuits. It also could spark additional congressional intervention.

"I'm trying to minimize the likelihood that today's decision will trigger another round now of investigations and litigation," he said.

"This is armchair quarterbacking," he said separately.

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.

When asked, he refused to give any company-specific detail of the payments included in the $1.6 billion figure, citing again his desire to balance his congressional mandate to perform the survey with the desire to avoid micromanaging the firms in question.

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; 11 of the 17 firms have fully repaid taxpayers. Industry officials say that firms have already revamped their compensation practices to avoid excessive risk taking and to ensure employee's incetives are aligned with the interest of shareholders and customers.

Feinberg said that executive compensation policies being pursued by regulators such as the Federal Reserve will have a much greater impact on industry practices than his post ever could.

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.

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

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