The global financial crisis deepens, with more than 10 million in the U.S. out of work, according to the Department of Labor. Unemployment hit 6.7 percent in November. Add the 7.3 million “involuntary part-time workers,” who want to work full time but can’t find such a job. Jobless claims have reached a 26-year high, while 30 states reportedly face potential shortfalls in their unemployment-insurance pools. The stunning failure of regulators like the Securities and Exchange Commission was again highlighted, as former NASDAQ head Bernard Madoff (you got it, pronounced “made off") was arrested for allegedly running the world’s largest criminal pyramid scheme, with losses expected to be $50 billion, dwarfing those from the Enron scandal. The picture is grim—unless, that is, you are a corporate executive.
The $700-billion financial bailout package, TARP (Troubled Assets Relief Program), was supposed to mandate the elimination of exorbitant executive compensation and “golden parachutes.” As U.S. taxpayers pony up their hard-earned dollars, highflying executives and corporate boards are now considering whether to give themselves multimillion-dollar bonuses.
According to The Washington Post, the specific language in the TARP law that forbade such payouts was changed at the last minute, with a small but significant one-sentence edit made by the Bush administration. The Post reported, “The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction.”
Read the fine print. Of the TARP bailout funds to be disbursed, only those that were technically spent “in an auction” would carry limits on executive pay. But Treasury Secretary Henry Paulson and his former Goldman Sachs colleague Neel Kashkari (yes, pronounced “cash carry"), who is running the program, aren’t inclined to spend the funds in auctions. They prefer their Capital Purchase Program, handing over cash directly. Recall Paulson’s curriculum vitae: He began as a special assistant to John Ehrlichman in the Nixon White House and then went on to work for a quarter-century at Goldman Sachs, one of the largest recipients of bailout funds and chief competitor to Lehman Brothers, the firm that Paulson let fail.
The Government Accountability Office issued a report on TARP Dec. 10, expressing concerns about the lack of oversight of the companies receiving bailout funds. The report states that “without a strong oversight and monitoring function, Treasury’s ability to ensure an appropriate level of accountability and transparency will be limited.” The nonprofit news organization ProPublica has been tracking the bailout program, reporting details that remain shrouded by the Treasury Department. As of Tuesday, 202 institutions had obtained bailout funds totaling close to $250 billion.
House Speaker Nancy Pelosi said recently, “The Treasury Department’s implementation of the TARP is insufficiently transparent and is not accountable to American taxpayers.” Barney Frank, D-Mass., chair of the House Financial Services Committee, said earlier, “Use of these funds … for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. … is a violation of the terms of the act.”
Republican Sen. Charles Grassley of Iowa said of the loophole, “The flimsy executive-compensation restrictions in the original bill are now all but gone.” Put aside for the moment that these three all voted for the legislation. The law clearly needs to be corrected before additional funds are granted.
The sums these titans of Wall Street are walking away with are staggering. In their annual “Executive Excess” report, the groups United for a Fair Economy and the Institute for Policy Studies reported 2007 compensation for Lloyd Blankfein, CEO of Goldman Sachs (Paulson’s replacement), at $54 million and that of John Thain, CEO of Merrill Lynch, at a whopping $83 million. Merrill has since been sold to Bank of America, after losing more than $11 billion this year—yet Thain still wants a $10-million bonus.
Paulson, Kashkari and their boss, President George W. Bush, might not be the best people to spend the next $350-billion tranche of U.S. taxpayer money, with just weeks to go before the new Congress convenes Jan. 6 and Barack Obama assumes the presidency Jan. 20. As Watergate leaker Deep Throat was said to have told Bob Woodward, back when Paulson was just starting out, “Follow the money.” The U.S. populace, its representatives in Congress and the new Obama administration need to follow the money, close the executive-pay loophole and demand accountability from the banks that the public has bailed out.
Denis Moynihan contributed research to this column.