US could cap big bonuses to bankers working on bail-out

Rising anger about bankers' pay could force US Treasury Secretary Hank Paulson to agree to tough new rules if he is to push through his mooted $700 billion Wall Street bail-out.

With opposition to the plan from all sides, the former Goldman Sachs man has now conceded it might be necessary to rein in the pay of the executives who work on the plan. Critics said the bankers ought to work for nothing, or at least have their pay capped at a maximum £1 million.

At first Mr Paulson said that bankers who advise on the scheme must be rewarded in line with industry norms. He argued that the best and brightest will be needed if the bail- out is to succeed.

He has now had a change of heart, fearful that the entire deal might be scrapped. "The American people are angry about executive compensation and rightfully so," he said. "We must find a way to address this in the legislation, but without undermining the effectiveness of this programme."

Mr Paulson himself was paid more than £25 million in his last year at Goldman Sachs. He still has many millions more tied up in shares that will get a boost if the plan goes through.

Democrat Barney Frank, chairman of Congress's Financial Services Committee, is pushing for the government to get stakes in firms that take government money in return for the toxic mortgage debt that has caused the global credit crunch. Mr Paulson's office, however, remains cagey about whether taxpayers will get equity in return for their massive cash injection.

Treasury spokeswoman Jennifer Zuccarelli would only say, "nothing is final and discussions are ongoing".

In Britain, the Government has threatened to clamp down on City pay, claiming that the rewards are so high that they corrupt decision making.

Gordon Brown said last week: "There's an element of the bonus system that is unacceptable."

Critics say that, short of introducing massive taxes on bonus payments, there is little the Government can do to stop banks making hefty pay-outs.

Bob Diamond, the number two at Barclays, still got a £15 million bonus this year despite massive losses at the investment banking unit he runs. Lehman Brothers' staff in New York will share a bonus pool of £1.4 billion when Barclays completes its deal to buy the bank. Barclays said the bonuses were agreed before Lehman went bankrupt and would be honoured. In the last few months, investment banks have reported tumbling profits and seen their share prices plummet. However, bankers are still enjoying megapay deals with staff at Goldman Sachs earning an average of $89,000 each for just three months work between the start of June and the end of last month.

Over a year, the average annual package would be worth $356,000 although high-fliers would rake in many millions each as the figures are dragged down by low-paid support staff.