How to Punish Wall Street, Protect Main Street

We're all in this mess together—unless the feds raise the cost to the Wall Street perps.

By SHARE

Megamillionaires don't usually mingle with pensioners. But like strangers in a jammed elevator, they're stuck with each other for awhile. Big problem. Because the two groups don't like each other at all.

That's why there's so much bile and controversy over the $700 billion Wall Street bailout plan that President Bush and his financial henchmen, Ben Bernanke and Henry Paulson, are trying to force through Congress. To work, the plan needs to salvage big financial firms at the heart of American capitalism, so they can keep providing the money that consumers need to buy homes, cars, and even food. But those firms tend to be run by Gucci-clad patricians whose salaries are hundreds of times higher than the people whose homes and cars they help finance.

The mood in Congress is to hang the Wall Street elite (until it's time to pass the hat for campaign contributions), but like virtually everything, it's not that simple. For better or worse, the millionaires and the pensioners share a common stake in the companies that are at risk of collapsing if the credit markets go dark and the economy nose-dives. The millionaires have, well, millions at stake, usually in the form of stock and options at the companies they run—and if they lose that, generally there's a pretty lavish backup plan. The average pensioner has way less actual money on the line, but it represents a far bigger chunk of his or her livelihood. The disparity of their circumstances is so vast that it zeroes out what should be their common interest in fixing the problem.

The surest way to punish all the greediest beneficiaries of the recent Wall Street hogfest would be to let their companies collapse one after the other. But millions of Americans—maybe even a majority—would be dragged into the wreckage as the value of their homes, retirement plans, investment portfolios, and college funds collapsed. Would vengeance be sweet? Hardly. So instead of mutual assured destruction, here are some ways Congress, the Treasury Department, and the Federal Reserve could punish the villains while safeguarding the overall economy:

Conduct the bloody bailout. It's odious to lend taxpayer money to firms so arrogant that barely a year ago, they were insisting they needed less regulation—not a government rescue—in order to compete with the best firms in the world. But they were wrong, and now most Americans have some stake in what happens to these gilded tar babies. That argument is over. The only real debate now is how big the bailout needs to be and how it should be done.

Forget about checks that are already cashed. Sure, it's outrageous that Freddie Mac CEO Richard Syron earned nearly $20 million in 2007, while guiding his company into a storm drain. His comrade at Fannie Mae, Daniel Mudd, earned more than $12 million, for similar results. Now, the government is committed to spending more than six times their annual pay—up to $200 billion—to salvage the companies these CEOs wrecked.

We need to get over it. Trying to "claw back" pay to which such CEOs were contractually entitled in the past is a hopeless venture, with massive expenditures on lawyers and unsatisfying outcomes years into the future. If there were fraud—which the FBI is looking into at Fannie, Freddie, and a couple other firms—then that's a different story. But the real fraud is probably that the CEOs' earnings were totally legal. Let's leave it at that and focus on better outcomes in the future.

Link bonuses to long-term performance. Corporate reformers—yeah, there are a few—have been pushing this cause for years, but even the Enron and WorldCom debacles failed to really empower shareholders and directors with a cudgel they could use to intimidate overpaid CEOs. As a result, CEO pay in 2007 was 275 times that of the typical worker, according to the liberal Economic Policy Institute, up from 71 times typical pay in 1989. That's a problem—and one the bailout enforcers might finally be able to do something about.

CEOs earn the bulk of their pay from bonuses, not from salary, and at most Wall Street firms, bonuses have been linked to how well the company performed in that particular year. Now, there's a coincidence: One cause of the current financial meltdown is securities that were sold down the river, often more than once, because the original seller made money on fees or returns linked to the initial sale and had no stake in the long-term performance of the security. One requirement for any firm taking advantage of a bailout could be new pay practices that only allow executives to get their bonuses if the company performs well over three or five years—not one—and the execs stay at the company the whole time.

That's how bonuses used to work at many companies, until they fell out of favor during the latest Wall Street bender. The money mavens will complain that such proletarian pay practices will drive the best talent elsewhere, in search of more money. The government, holding all the cards (and the money) should just say bye-bye. The best talent got us into this mess, so maybe it's better if all those supersmart guys move out to the fringe somewhere.

Charge usurious fees to bailout recipients. AIG is emerging as an interesting case study in overcharging the affluent. The government pulled the huge insurance firm from the brink of bankruptcy with an $85 billion loan in mid-September, but it imposed a steep interest rate of about 11 percent, well above market rates for most solvent companies. The pain of that added expense has led AIG shareholders to hustle up a plan to sell assets, so it can free itself from federal largesse.

Federal loan sharks: what a concept. In exchange for its deep pockets, the government funded by you and me could keep our financial-service providers in business and either make money on the deal through fees and high interest rates, or cause its borrowers so much discomfort that they race to get out of hock. Now, there's a deal that's too good to refuse.