Published August 28, 2009

Alarm bells ring over Sarkozy's threat to freeze out bankers

France will not hire them unless they apply pay-limit rules

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(NEW YORK) French President Nicolas Sarkozy's plan to shun bankers who do not accept pay limits was met with alarm by analysts and investors in the US, where bailed-out companies are being grilled by the government on how they compensate top-paid executives.

Mr Sarkozy: Wants the G-20 to consider capping what banks pay and what individuals receive in bonuses

'I find Sarkozy's statements threatening,' said Bruce Foerster, president of South Beach Capital Markets in Miami and a former Lehman Brothers executive.

France will not hire financial firms unless they apply rules agreed to by French bankers that include a three-year deferral on two-thirds of bonus payments, Mr Sarkozy said on Wednesday. He aims to bring his proposals to the Group of 20 summit in Pittsburgh next month, which President Barack Obama is scheduled to attend.

Mr Sarkozy is 'coming to Pittsburgh and is going to be whispering in the ear of a president who has shown some willingness to listen to that kind of thinking', Mr Foerster said.

'President Obama has made a lot of scathing comments about banks and bankers' compensation.'

Mr Obama has asked his 'special master' on pay, Kenneth Feinberg, to establish pay guidelines for executives at the rescued companies, which also include Bank of America and General Motors.

The measures aim to reduce incentives that led executives to take excessive risks and to quell a political outcry over bonuses paid at American International Group, whose compensation practices are also under review by Mr Feinberg.

White House spokesman Tommy Vietor declined to comment.

The looming rulings from Mr Feinberg, who has about two months to respond to the pay proposals, have prompted companies including Bank of America and Citigroup to add clauses into some new employment contracts stating that some compensation may be subject to government approval or limitations.

'This is a good way for the corporation to save face if it's challenged by the government, being able to say we looked into this and took this into consideration,' said lawyer Thomas B Lewis of Stark & Stark in Princeton. 'It's probably only going to come into play with the very high-wage earners.'

In France, institutions including BNP Paribas SA and Societe Generale have agreed to the deferral and promised to pay out a third of bonuses in shares. They also pledged to stop offering guaranteed payouts to new hires.

Mr Sarkozy said that he wants the G-20 to consider capping the total amount paid out by banks in bonuses and to consider setting limits on the size of individual bonuses. The meeting in Pittsburgh follows one held in London in April, when the group promised tighter rules on pay for bankers.

'I will fight in Pittsburgh to amplify the commitments made in London,' said Mr Sarkozy. 'The problem is global and has to be treated globally. France won't accept the most minimal position or wait to act.'

German Chancellor Angela Merkel said yesterday that she supports Mr Sarkozy's plan of extending the payment of bonuses over time and his call for tougher limits. She said that the two leaders would discuss the matter next week before the G-20 summit.

'Bonuses will be a central topic, because it's annoying that some banks are continuing to do things almost exactly the way they did before,' Ms Merkel told N24 television. 'It promotes risk. That's why we need to think about how we can intervene and set limits.'

Mr Sarkozy's demands will be difficult to enforce globally, said Charles Geisst, a professor of economics and finance at Manhattan College and author of Wall Street: A History. 'It's an interesting remark. I sort of take that on the shady side of the street, as a political comment.'

Mr Sarkozy said that he wants France to 'set an example' on banker pay. That means applying political pressure on leaders such as UK Prime Minister Gordon Brown and President Obama to follow suit.

'If they refuse to do the same thing as us, they'll have to explain it to their citizens,' said Rene Ricol, who Mr Sarkozy made an ombudsman last year to ensure that the banks keep lending.

Almost eight in 10 Britons criticised proposals by the Financial Services Authority to restrict pay, a poll by YouGov Plc showed.

'We'll be the first to do this,' French Finance Minister Christine Lagarde said on RMC radio. 'If we don't take the initiative, no one will.' - Bloomberg