Utah study: TARP's pay limits didn't doom those who were bailed out

Its shortcomings aside, the controversial Troubled Asset Relief Program has been effective despite initial concerns about its restrictions on executive pay, according to a new study from the David Eccles School of Business at the University of Utah.

The $700 billion TARP program was used about four years ago to rescue AIG, General Motors, Bank of America, Citigroup, Wells Fargo, JPMorganChase and other firms during the height of the financial crisis. And its executive pay restrictions were meant to end a spate of "golden parachute" exits by leading officers of failing companies, as well as restrain the huge bonuses they were collecting.

Critics contended the policy would lead to a "brain drain" of firms' best and brightest to nonparticipating corporations, which would put taxpayer money at risk.

But in a paper published this fall in the Journal of Business Finance & Accounting, University of Utah researcher Brian Cadman writes that although some executives did bail out of their troubled firms, those companies went on to recover and even thrive.

"Our most important finding, in fact, was that compensation restrictions led to a more efficient allocation of the TARP funds," said Cadman, an assistant professor of accounting. "It's not that we want to argue that asset relief should always come with ways to limit executive compensation, but in this case, those limits actually helped the government allocate TARP funds more efficiently."

Further, "those who needed TARP took the money and ended up performing as well as those who didn't," noted Cadman and fellow researchers Mary Ellen Carter of Boston College and Luann Lynch of the University of Virginia in their paper "Executive Compensation Restrictions: Do They Restrict Firms' Willingness to Participate in TARP?"

Indirectly, the study also may be instructive to economists and business leaders worried about the twin threats of the nation's pending "fiscal cliff" — the draconian spending cuts and tax increase the federal government faces at year's end without reforms — and the looming threat of a renewed recession if budget woes, and the nation's $16 trillion-plus debt, are not addressed.

"From an academic standpoint, the type of increased lending represented by TARP increased the national debt at a time of credit crisis. Whether the long-term payback of this will outweigh the cost? That's hard to say," Cadman acknowledged. "But the positive we documented is that TARP did actually increase lending from recipient banks, and that, in effect, led to a healthier economy."

Cadman and his colleagues reached their conclusions by comparing economic and compensation characteristics from 228 firms that accepted TARP funds to 35 other firms which, though approved for TARP, opted to decline the aid. —

Read the study

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