It's bad enough that taxpayers are being asked to bail out Wall Street firms and banks to the tune of $700 billion for their greed and recklessness.
But lawmakers should draw the line at asking the public to pay for golden parachutes for the CEOs who helped to bring the financial system to the brink of collapse.
Treasury Secretary Henry Paulson presented Congress over the weekend with a two-year bailout plan. The document was only three pages long, a brevity belying the enormous consequences for the U.S. economy and world markets.
Congressional Democrats are trying to inject a bit of accountability into this deal. They want Treasury to force firms that are selling their troubled assets to the government to limit executive compensation, including the ability to rescind bonuses and curtail severance packages.
Paulson has balked at that idea, saying banks won't participate in the rescue plan if the bailout package is "punitive."
The secretary, a former investment banker himself, is suffering from a case of misplaced allegiance. Taxpayers, not bankers, will be footing the bill for this bailout.
Most taxpayers don't support the rescue plan, even if they understand that some government action is needed to prevent a wider economic crisis. It makes it even more unpalatable to them to think they would be paying for some CEO's soft landing.
When the federal government took over mortgage giants Fannie Mae and Freddie Mac, it rescinded $12.5 million in severance pay and bonuses for the firms' two top executives. That action allowed the gentlemen to walk away with a total of
only
$9.4 million.
Neither Paulson nor bank boards should object to such restrictions. As envisioned in the bill, Paulson would have discretion to determine what is "inappropriate or excessive" as a bonus or severance. The legislation would not impose a dollar figure.
Given the mood of the public, bank CEOs should be relieved the legislation allows them to take away anything at all.
Why should taxpayers, who are dutifully paying off credit-card debt and car loans, shell out seven-figure bonuses to Wall Street financiers whose irresponsible decisions precipitated this mess?
The cost of executives' compensation is insignificant, compared with the overall tab that taxpayers will pay. But the steep price to underwrite the financial health of banks serves a larger good by trying to stave off a deep recession.
On the other hand, providing a taxpayer-financed pillow for CEOs to land on would serve no public purpose, would reward bad decisions, and would undermine what little public support exists for the bailout.
A better proposal would include in the bailout a program to help homeowners at risk of default by allowing judges to rewrite mortgages to lower their monthly payments. That could help stabilize falling home prices, which are at the core of the problems.
Lastly, there must be more oversight of financial institutions as part of this deal. One person at Treasury shouldn't have all the centralized authority to dispense this rescue plan without parameters. If taxpayers are expected to bail out private enterprise, there must be greater protections against such calamities.
Congress needs to get this right. It being an election year, many lawmakers want to get out of Washington by week's end and go home to campaign. Instead, they should stay on the job as long as necessary to craft a sensible plan. Lawmakers need to make sure taxpayers are "first in line" to be repaid when the financial system stabilizes again.