Bush added loophole to Wall Street bailout provision Change removed ways to review executives' pay

WASHINGTON — Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, the small change looks more like a giant loophole, according to lawmakers and legal experts.

In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee.

The modification reflects how the rapidly shifting nature of the crisis and the government's response to it have led to unexpected results that are just beginning to be understood.

The Government Accountability Office, the investigative arm of Congress, issued a report last week about the financial industry rescue package that said it was unclear how the Treasury would determine whether banks were following the executive-compensation rules.

Michele Davis, spokeswoman for the Treasury, said the agency is working to develop a policy for how it will enforce the executive-compensation rules. She would not say when the guidance would be issued or what penalties it might impose. But she said the companies promised to follow the rules in contracts with the department.

The Bush administration at first opposed any restrictions on executive pay, congressional aides said. The original bailout proposal presented to lawmakers in September contained no mention of such limits.

Under pressure from Congress, the Treasury issued regulations in October on executive compensation and applied tax-deduction limits to all companies receiving bailout funds, although the legislation did not require it for firms that received direct capital injections. But the Treasury didn't issue guidelines requiring the Internal Revenue Service or any other agency to enforce the rules, and it didn't explain how the restrictions would be enforced.

Senators on the Finance Committee are now considering whether they should amend the law to apply the enforcement mechanism to all firms participating in the bailout.