The panel was expected to endorse the measure on Thursday, paving the way for a floor vote as early as next week.
The proposal, sponsored by Democratic Reps. Alan Grayson of Florida and James Himes of Connecticut, would not force employees of insurance giant AIG to give back money already paid to them. But it would empower the government to stop future payouts by financial institutions even if employees have been promised the money.
The bill would exempt firms willing to participate in a government-sponsored program aimed at buying up $1 trillion of bad debt, or "toxic assets," sitting on the books of major banks.
Republicans opposed the bill because they said it was too vague.
"Private investors need certainty that Washington will not change the rules of the game while the game is being played," said Rep. Spencer Bachus of Alabama, the committee's top Republican.
But Democrats said it was necessary to protect taxpayer dollars. They pointed to a provision that would require Geithner to set standards to measure an employee's performance and the stability of a financial institution before bonuses are paid.
"This bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure," said Grayson.
The plan is aimed at putting to rest a flap over lofty bonuses paid by American International Group Inc. after the government committed more than $182 billion to keeping the company afloat.
The company paid out $165 million in bonuses March 15, igniting a firestorm of outrage from Obama, lawmakers in both parties and the public. Since then, many of the biggest receivers of AIG bonuses have returned them or donated them to charity.
Obama later sought to tone down the anti-Wall Street rhetoric as he assembled his plan to rely on private investors to help rid banks of the sour mortgage securities. Geithner announced the new strategy on Monday.
For the plan to work, the government must persuade investors to trust that it will live up to its end of the bargain - a challenge made harder by the House's vote to tax away 90 percent of any bonuses agreed to in 2008 and paid this year by AIG or other recipients of bailout money.
Obama told reporters on Tuesday that while bankers shouldn't get rich on the taxpayers' dime, "the rest of us can't afford to demonize every investor or entrepreneur who seeks to make a profit. That drive is what has always fueled our prosperity, and it is what will ultimately get these banks lending and our economy moving once more."
Obama's comments and Republican opposition threw cold water on the House tax bill's momentum in Congress. A Senate version of the bill stalled, and Majority Leader Harry Reid, D-Nev., said senators were reviewing their options.
Rep. Barney Frank, chairman of the Financial Services Committee, said this latest bill would exempt firms who agree to partner with government to buy the toxic assets because "we do want to encourage wide participation" in the program.
In addition to major banks and companies like AIG, the bill would apply to Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
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