It seems that when Congress is not in session that there is at least some peace, some tranquility, and some notion of what the rules of the great financial game for tomorrow will be.  But now that Congress has returned after a two-week hiatus, the rules of the game are possibly changing again and we have no clear notion as to what the policy of the Administration is going to be in the very important matter of the $1 trillion Public-Private Partnership Investment Program (the PPIP).  This started out as hints, but it looks like the issue of executive compensation could come into play at those companies who are considering investing in the PPIP.  If the Treasury or the Administration does not quell this notion immediately, then PPIP is probably going to implode before it ever makes it into policy.

This possible change may be nothing more than lawmakers testing the waters to see just how much they can get away with.  But this also flies against what the investment community has understood as the Obama administration’s position.  It also flies in the face of what rewards should be for taking risk.

We saw a brief note on this in the Washington Post and did not seriously believe it at first glance.  But then in today’s Congressional Oversight Panel hearing with Treasury Secretary Timothy Geithner there was a note from Congressmen John Sununu that there are members of Congress who are considering rules to compensation for those who participate.  Sununu said this is another after-the-fact change that could discourage participation.

Sununu’s comments are for all practical purposes the understatement of the year.  If you cap compensation at firms who are being asked to participate in investing alongside with the government to buy toxic assets from troubled banks, then what the hell is the incentive for any of the investors to participate at all?  This is a striking incident of compensation limitation gone wild, and may be the most egregious example yet.

Geithner said that investors need clarification on what the rules will be.  He later said that Treasury and the Administration are in the process of completing draft of a rule for applying those conditions.  On this notion he said, ” We are going to apply the law… We are putting out  in the public domain a comment for draft rule.”  And on the notion of clarification of what the rules will be ahead of time, Geithner said “you can’t feel more strongly than me” on the notion of clarity ahead of time.   But without even trying to quell this notion, how will any new investor (which is supposed to help save the system) in their right mind put risk-capital up under these circumstances?

You can watch Geithner’s testimony here, and that exchange between Sununu and Geithner takes place from 1 hour and 22 minutes to 1 hour and 30 minutes in this.

So, let’s get this straight for those who were considering investing alongside the government in buying these toxic assets from the troubled banks….  This means that new investors (and their executives), who had nothing to do with the financial mess and those who are also being asked to invest in these toxic assets, could be told that they have limitations on their compensation.

Jamie Dimon of JPMorgan Chase & Co. (NYSE: JPM) has said that his firm would not be participating in the PPIP.  While this of course put a negative cloud over the program, we thought (better yet, hoped) that Dimon’s comments were a signal that healthy banks don’t want to hold any more of the garbage assets than they already do.  It could have also been a notion that this was a game for speculators and hedge funds rather than much more highly regulated banks.  But now it is becoming more clear what this means.

It is ‘formally’ unknown as to exactly who has resurfaced with the notion that PPIP investors would face limits on executive compensation.  We have our own opinions on where that is coming from, but without a direct claim of responsibility today we are going to hold off on pointing this out.  But to that person or group, we would like to congratulate those lawmakers for probably just killing the one notion that the outraged public seemed to be supporting the most.

If this notion is really the goal, then perhaps these lawmakers should just pass the hat around and demand mandatory donations with no tax benefits from the private sector to take these assets off the books of troubled banks. It would at least be a lot more honest.  Sometimes the pendulum swings too far.  In this case, it is flying in an infinite direction away and can’t come back.

JON C. OGG

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