DealZone

Compensation consultants say that limiting executive pay at TARP-recipient banks will make the banks less competitive. They argue that nobody worth their (market) weight in gold wants to work for a bank where the only bonus beyond a half-million-dollar salary is restricted stock options that can’t be cashed in until taxpayers get their due. They may be right, though the market for pricey financial whiz kids and rocket scientists is hardly a rich one these days.

Whenever Uncle Sam steps in as lender of last resort, taxpayers had better concern themselves with the concept of Moral Hazard: that banks can invest recklessly because they know they will get bailed out in the end. The $500,000 pay cap is, in effect, a Moral Hazard roadblock, raising the cost of a bailout for would-be Wall Street gamblers.

But neither side in this argument should get too excited. With nearly $300 billion of TARP funds already out of the bag, and the new compensation rules applying only to future TARP tappings, most of the best executives (such as John Thain’s crew at TARP-funded takeover disaster Merrill Lynch) have already been paid off.

At this point, perhaps the best that free marketers and taxpayers alike can hope for is that executives of submerged financial institutions opt for the failure they have earned rather than a taxpayer lifeline.

Other Deals News:

* China Investment Corp, a $200 billion sovereign wealth fund, and state-owned China Development Bank are both in talks to buy into CITIC Capital Holdings Ltd, an official newspaper said.

Citi scrapped plans to buy a $50 million corporate jet after it raised eyebrows all the way to the White House. Politicians called the order, which was made in 2005, wasteful. 

True, Citi has been propped up by taxpayers, swallowing up $45 billion of capital since October. Its market value is now only about $17 billion. And it has lost more than $28.5 billion in the last 15 months.

But how unusual is it for a company the size of Citi, once the world’s largest bank, to have a corporate jet? 

First Bill Perkins likened the architects of the $700 billion U.S. bailout to communists. Now the Houston-based venture capitalist is going after the capitalists.

In his latest full-page ad in the New York Times, Perkins raises a question about the propriety of Goldman Sachs buying the majority of Constellation Energy’s London-based commodities business.

“Question #1: Does anyone else find it troubling that a government bailed out bank (Goldman Sachs) is buying a European Energy Speculation Outfit? It’s your money!!!”

As economists talk increasingly of recession morphing into depression, it seems only natural that a Troubled Asset Relief Program should be built into something more substantial than a ground-covering sheet of plastic. Enter the Good Bank/Bad Bank model. Many a Wall Street veteran will remember this approach as the answer to the S&L crisis in the 80s. Fewer will recall its use in the 30s when the banking sector toppled like a line of dominoes. And markets are rising this morning, with huge injections of government cash going into Bank of America, and Citigroup preparing for its big split of good and bad assets.

Citigroup’s broad restructuring plan announced this morning is of this tried and tested Good Bank/Bad Bank design. It came with a fresh $8.29 billion fourth-quarter loss, the bank’s fifth straight quarter in the red.

“The history of Good Bank/Bad Bank is surprisingly positive,” said Michael Holland, founder of fund manager Holland & Co. “It worked a couple of decades ago, so I think it’s one of the first steps toward some positive news and the end of this nightmare. We have for the first time in a long time some reason to think positively.”

“Too big to fail” are four words that should fill U.S. policymakers with dread. They imply a necessity for solvency beyond an institution’s ability to make good business decisions. They’re also a badge of achievement that commands a bit more swagger on Wall Street.

So when Bank of America, with $2.7 trillion in assets and 308,000 employees, says it needs more help in the form of billions of dollars from taxpayers, which we have set aside for just this kind of mess (the Troubled Asset Relief Program), you could argue that this is both economic blackmail and reward for a job well done.

What happens when a bank becomes too big to fail? It gets shrunk down to a size more collapsible. The titans of Wall Street know a thing or two about being in hock to the people. Take a look at Citigroup. It’s all well and fine for CEO Vikram Pandit to say the sale of his brokerage business to Morgan Stanley was not mandated by the government, which has lent Citi $45 billion to stave off failure. But it’s hard not to see a wink and a nudge in there somewhere. This was not some non-core, fringe business — it’s more like an arm or a leg.

With the ink drying on Citi’s deal to sell Smith Barney to Morgan Stanley, the media bulls-eye is focusing on Citi CEO Vikram Pandit. “Citigroup’s board may have said it is standing behind CEO Vikram Pandit, but the general consensus on Wall Street is that he is running out of time,” CNBC’s Charlie Gasparino reported this morning. Pandit’s predecessor Chuck Prince certainly had boardroom support when the street turned against him, so tales of Pandit’s demise may not be too exaggerated, though they could not have been more callously timed. Today is Vikram Pandit’s 52nd birthday.

Of course, it’s a truism of corporate America that every CEO has the support of his board — until he doesn’t. And even if the current board is rock solid for Pandit, it’s an open question how safe the board’s own tenure is given the bank’s miserable track record — and the fact that Uncle Sam is now its top shareholder.

Citigroup, once the world’s largest bank, may announce plans on Jan. 22 to formally shed the “financial supermarket” approach once championed by former Chief Executive Sandy Weill, but which Pandit has now turned his back on.

Unsurprisingly, scandal-slammed Indian outsourcing firm Satyam says it may need some liquidity support to stay alive. Satyam founder and chairman Ramalinga Raju said he inflated his company’s reported cash and bank balances by more than 50 billion rupees ($1 billion). He seems to have taken to the Hyderabad hills — the company says it has no idea where he is. In a state known for its separatist tendencies, he may well stay disappeared for some time.

The interim CEO and company officers say they are committed to picking up the pieces. But this little “liquidity support” bombshell could prove to be a tricky one if it is directed at the biggest bail-out office currently handing out cash: the U.S. Treasury. Not being a U.S. company, Satyam probably doesn’t have the chutzpah to seek TARP funds directly. The company’s primary function as an outsourcing center would make the use of U.S. bailout funds politically repugnant to U.S. officials.

But the idea of foreign companies applying for U.S. taxpayer support is not a new one. Financial institutions the world over, saddled with dud U.S. mortgage-backed debt, have grumbled that they should get the same consideration as U.S. investors.

Wilbur Ross is still in the running for a bank, although his plans to buy one were delayed when the U.S. government stepped in with its $700 billion package to bail out the sector, the investor told CNN Money in an interview.

The rescue package delayed Ross’ plans by six to 12 months, the report said.

“We will end up with a bank, there is no doubt about that,” the report quoted Ross as saying.