Cross-Posted FromThe End of the American Century

President Obama called Wall Street bankers "shameful" after reports that they had given themselves some $20 billion in bonuses this year, just as the economy was deteriorating and the government spending billions to bail them out.

Here's a modest proposal: for companies receiving federal bailouts, let's limit the pay of those CEOs to what the President of the United States earns--$400,000.

Once those bailout companies have repaid our tax-paid bailout money, they can return to paying themselves tens of millions of dollars yearly, as they do now.

To give you some context, here are the top ten recipients of federal bailout money under the TARP (Troubled Asset Relief Program).


1. Bank of America, $45 billion
2. Citigroup, $45 billion
3. AIG, $40 billion
4. JPMorgan Chase, $25 billion
5. Wells Fargo, $25 billion
6. General Motors, $10.2 billion
7. Goldman Sachs, $10 billion
8. Morgan Stanley, $10 billion
9. PNC Financial, $7.6 billion
10. U.S. Bankcorp, $6.6 billion

And here are the 2007 total compensations for the CEOs of those same firms:

1. Kenneth Lewis, $20.4 million
2. Vikram Pandit, $3.2 million
3. Martin Sullivan, $13.9 million
4. James Dimon, $28.9 million
5. John Stumpf, $11.4 million
6. G. R. Wagoner, $15.7 million
7. Lloyd Blankfein, $54 million
8. John Mack, $41.4 million
9. James Rohr, $14.5 million
10. Richard Davis, $5.9 million

These men are all multimillionaires, even if you only count their take from last year. They can afford to slum it for a while on the salary of the President of the United States. And if these CEOs are genuinely committed to help their companies, and the United States, recover, then they should be willing to forego a little extravagance for a few years. If they are unwilling to do so, then the federal government should appoint a caretaker CEO until the bailouts have been repaid.

The rules of the game have changed. These companies and their CEOs have brought this country to the brink of economic disaster. The government has stepped in to save these companies, as a means of rescuing the economy. There can no longer be any argument that multimillion dollar compensation packages are necessary to attract "talent." It was not true in the past (when CEO salaries were far lower); it is not true in other countries (where CEO salaries are a small fraction of American ones--see chart below); and it is not true now--when this "talent" drove their companies, and the economy, into the ground.

Congress has talked about limiting the pay of bailout CEOs, but they have done nothing about it. It is time. And this idea--of limiting these CEO salaries to the level of the highest paid government executive--was even profferred by Republican John McCain during the campaign:

"no C.E.O. of any corporation or business that is bailed out by us, that is rescued by American tax dollars, should receive any more than the highest paid person in the federal government."

CEO Pay as a Multiple of Average Worker Pay, in US and Other Countries
(From The End of the American Century, p. 40)

Cross Posted From The End of the American Century   

Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. But what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.

A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.

Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.

"And there's another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.

These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is right on target.  There will not be a recovery like ones of the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.

Take a look at Roberts' essay, and offer your thoughts.

Last week, John Thain, the former CEO of Merrill Lynch was sacked by the CEO of Bank of America, which recently absorbed the bankrupt brokerage firm. Thain is a prime example of the mind-boggling greed, incompetence and cluelessness of the captains of the U.S. financial services sector. (See also Zachary Roth's TPM blog on "John Thain's Top Ten Greatest Moments")  I called attention to Thain in my September blog on CEO pay, where I noted that Thain was the highest paid CEO in 2007, with compensation exceeding $83 million. This was a year in which Merrill Lynch lost $7.8 billion, mind you. Granted, Thain didn't take over Merrill until November of 2007. But 2008 was even worse. Merrill's losses of $27 billion last year was what led to its absorption by Bank of America.

But Thain's greed and arrogance gets even worse. He apparently demanded a bonus of $30-40 million for 2008, the year he presided over the company's bankruptcy and collapse. This was after Merrill had already received some $10 billion from U.S. taxpayers as part of the federal government's financial bailout. Furthermore, according to a story in the Financial Times, Merrill granted some $4 billion in bonuses to other executives in the company, just before the Bank of America takeover was finalized. As the Financial Times observers, "this was money that appeared to come directly from US government funds."

A New York Times story says that Thain spent $1.2 million to redecorate his Merrill Lynch office last year, including an $87,000 rug and a $68,000 credenza.

John Thain stands out as the worst abuser of corporate and government funds. But the problem is much wider than John Thain or Merrill Lynch, and extends across the entire corporate landscape. These huge CEO compensations in the U.S. are horribly inflated, both by historical standards and in comparison to other capitalist countries. In the 1980s, average CEO pay in the U.S. was about 50 times that of average worker pay. In Germany, Canada, and Japan, the ratio is less than 25 to 1. In the United States in recent years, on the other hand, that ratio has approached 500 to 1.

Thain is out, thank goodness. New York Attorney General Andrew Cuomo is investigating the bonus payments in Merrill Lynch. There is some accountability there, at least. U.S. representatives and taxpayers should make sure, though, that U.S. citizens do not subsidize the lavish lifestyles and obscene salaries of executives in companies that are receiving taxpayer money. Most of them are multimillionaires already. If they truly want to help the economy and the country (as most of them say they do), let them live on an average worker's salary for a few years.