The architects of the $700 billion bailout agreement defeated in the House left some key details tantalizingly undefined.
By Sam Pizzigati
Act One of the great bailout debate has now ended. The agreement that lawmakers and the White House announced Sunday essentially tried to buy time — by committing the federal government to purchasing up to $700 billion of “troubled assets.” But the American people weren’t buying.
Why did the bailout agreement fail in today’s House vote? The bailout package, at root, left too many fundamental questions unanswered. No one quite knew, despite the over 100 pages of bailout bill text, exactly where all the dollars from that $700 billion pot were going to go — and where the dollars in that pot were going to come from.
[1]How many bailout dollars, for instance, would go to feathering the already opulent nests of Wall Street executives? And how much of the bailout cost would ultimately fall on taxpayers?
Negotiators acted as if these questions had all been satisfactorily resolved. They trumpeted the provisions in the bailout deal that spoke to restraining executive pay. They’re also emphasized the provision that would have given taxpayers an equity stake — shares of stock — in bailed-out companies.
These provisions certainly did represent a clear step forward over the blank-check bailout that Treasury Secretary Henry Paulson originally proposed. But these added provisions didn’t go nearly far enough.
An equity stake would indeed return dollars to taxpayers, but not until years down the road, and only if the bailed-out companies recover enough to see their share prices rise.
And the bailout’s executive pay provisions didn’t set a specific lid on the compensation that can go to top execs at bailed-out companies. The key bailout provision on executive pay merely directed Treasury Secretary Paulson to “require that the financial institution meet appropriate standards for executive compensation and corporate governance” — without defining “appropriate.”
Bailout critics consider that a big mistake.
“Secretary Paulson amassed a personal stock stash worth over three-quarters of a billion dollars as the CEO at Goldman Sachs,” notes Institute for Policy Studies analyst Sarah Anderson. “He hardly strikes us as the appropriate arbiter of what’s appropriate and what’s not.”
Bailout critics are also demanding that lawmakers make America’s high-finance power-suits pay now for the mess they’ve created — by having the federal government tax the rich, not just borrow from them.
Progressive groups have already begun laying out specific proposals [2] — a tax on speculative transactions, for one, and a tax surcharge on household wealth over $10 million — that could offset the bailout’s upfront cost and raise dollars to stimulate the “real” economy that America’s working families inhabit.
Progressives are also pushing [3] for specific executive pay restraints that directly challenge Wall Street’s mega-million bonus culture — and the reckless executive behavior this bonus culture incentivizes.
Some lawmakers last week did make an effort to weave specifics into the bailout bill. Rep. Henry Waxman from California proposed a $2 million cap [4] on executive pay at bailed-out companies, and Senator Max Baucus from Montana promoted a provision [5] that would deny bailed-out corporations tax deductions on any executive pay over $400,000.
Interestingly, GOP Presidential candidate John McCain, in a comment early last week, called [6] for capping pay for bailed-out execs at the current compensation of the federal government’s highest-paid employee. That employee, the President, currently makes $400,000.
Democratic lawmakers, unfortunately, never called McCain’s bluff [7].
The bailout deal spelled out Sunday [8] did, to be sure, include a variation on the Baucus proposal, a $500,000 cap on the executive pay certain bailed-out firms could deduct from their taxes.
The legislation also prohibited “golden parachutes” — severance windfalls — for execs who bail out of bailed-out companies and gave fed officials the greenlight to recover “any bonus or incentive compensation paid to a senior executive officer” based on phony accounting maneuvers.
But the bailout legislation placed no limit on the pay that could go to executives at bailed-out companies — or the executives of the companies hired to manage the “troubled assets” the government would have gone on to buy in the bailout.
What would an appropriate limit be? The Washington, D.C.-based Institute for Policy Studies notes that $400,000 equates to about 25 times the pay of the lowest-paid federal worker. That’s the same pay ratio, the Institute reminded lawmakers last week, that Peter Drucker, the founder of modern management science, wanted to see between top and bottom in private-sector corporations.
Any pay gap wider than 25-to-1, as a recent Business Week commentary [9] on Drucker’s work observed, undermines the teamwork that modern enterprises need to operate effectively. The actual pay gap last year between U.S. CEOs and their workers: 344 times [10].
A 25-to-1 executive pay standard might even get the support of some moderate lawmakers — like Senator Dianne Feinstein.
“The top compensation package for any company seeking a bailout,” the California senator said last week [11], “should be $400,000.”
And what if the CEOs object?
“Put them in their yachts,” responded Feinstein, “and ship them out to sea.”
Sam Pizzigati edits Too Much [12], the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies.