Walve Fever

To fix the U.S. ut that soaks them.

September 29, 2008

By Sam Pizzigati

Act One of the great bailout debate has now ended. This January, with a new President in the White House, the curtain will go up for Act Two. The agreement that lawmakers and the White House announced Sunday essentially buys time — by committing the federal government to shell out up to $700 billion buying up troubled assets. But fundamental questions remain unanswered.

No one yet knows, despite the new agreement, exactly where all the dollars from that $700 billion pot are going to go — and where the dollars in that pot are going to come from.  

How many bailout dollars, for instance, will go to feathering the already opulent nests of Wall Street executives? And how much of the bailout bill will ultimately go to taxpayers?

Negotiators are acting as if these questions have now been satisfactorily resolved. They’re trumpeting the provisions in the bailout deal that speak to restraining executive pay. They’re also emphasizing the provision that will give taxpayers an equity stake — shares of stock — in the bailed out companies.

These provisions certainly do represent a clear step forward over the blank-check bailout that Treasury Secretary Henry Paulson originally proposed. But these added provisions don’t go nearly far enough.

The equity stake will 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 don’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 directs Treasury Secretary Paulson to ban “excessive and inappropriate” compensation — without defining excess.

Bailout critics are calling 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,” Institute for Policy Studies analyst Sarah Anderson noted last Friday. “He hardly strikes us as the appropriate arbiter of what's excessive 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 — 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 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 on executive pay at bailed-out companies, and  Senator Max Baucus from Montana promoted a provision 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 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.

But Democratic lawmakers never called McCain’s bluff. The bailout deal, as spelled out Sunday, places no specific lid on the pay that can do to either executives at bailed-out companies — or the executives of the companies hired to manage the “troubled assets” the government goes on to buy in the bailout.

What should that lid 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, and the Institute wants that 25-to-1 ratio set as the bailout standard.

That’s the same top-and-bottom pay ratio, the Institute reminded lawmakers last week, that Peter Drucker, the founder of modern management science, always used to recommend for private-sector corporations.

Any pay gap wider than 25-to-1, as a recent Business Week commentary on Drucker noted, undermines the teamwork that modern enterprises needs to operate effectively. The actual gap last year between CEOs and their workers: 344 times.

Ideally, Institute for Policy Studies CEO pay analysts believe, Congress should approve both the Baucus proposal to cap the tax deductibility of executive pay as well as a ceiling on total compensation.

That approach might get the support of even some moderate lawmakers — like Senator Dianne Feinstein..

“The top compensation package for any company seeking a bailout,” the California senator said last week, “should be $400,000.”

And what if the CEOs object?

“Put them in their yachts,” suggested Feinstein, “and ship them out to sea.”

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Sam Pizzigati edits Too Much, the online weekly on excess and inequality.