Taxpayers got rolled--again.
That's the conclusion of a scathing new report by a Treasury Department watchdog overseeing the 2008 and 2009 bailouts of General Motors, AIG, Ally Financial, and several other troubled firms. In 2012, the Treasury approved pay of $1 million or more for 68 executives at the three firms, even though they were still operating with taxpayer assistance. Treasury approved pay of $3 million or more for 37 of those executives, and $5 million or more for 16 of them.
Such lavish compensation violated the Treasury's own guidelines for pay at rescued firms, according to the Special Inspector General for the TARP bailout program, known as SIGTARP. Treasury guidelines call for maximum cash salaries of $500,000, with anything above that awarded as longer-term incentives meant to discourage risk-taking that boosts short-term profits at the expense of stability. Yet Treasury-approved pay packages exceeded those limits for at least 70 percent of executives subject to oversight in 2012. Treasury "is effectively relinquishing some of [its] authority to the companies, which have their own best interests in mind," the report found.
The natural reaction to this is outrage, if there's any left after all the awful revelations that followed the extraordinary bailouts in 2008 and 2009. Yet every mistake involving the bailouts provides important insights about what the government can and can't do well during an economic emergency. With luck, we'll learn enough from these mistakes to do it better next time (and there will be a next time).
The biggest problem with regard to executive pay is that the bailouts left the rescued firms as hybrid operations trying to operate by free-market principles while under strict government supervision. They were neither fish nor fowl. It turned out to be an unworkable situation requiring one model or the other to prevail.
Treasury wanted the rescued firms to operate like regular businesses so they could repair themselves and pay back taxpayer funds as quickly as possible. Yet doing this required talented executives paid at the same scale as other big firms, to assure they wouldn't bolt for better-paying jobs, causing more high-level turnover at companies that were already reeling.
We can have a healthy debate about whether corporate America overpays its top people, but for better or worse, typical pay for top officers at Fortune 100 firms often tops $1 million per year. It's also worth pointing out that fixing a complex, sprawling and massively broken company such as GM or AIG is one of the toughest jobs in business. It takes somebody who's seasoned and dogged, even though dozens of armchair critics no doubt feel they could have done a better job. They couldn't have.
Yet the politics of democratic government make it highly problematic to use taxpayer funds to pay anybody a million-dollar salary, especially since the president himself earns just $400,000 per year. No matter how rational the argument might be, it's political dynamite.
In one sense, this hybrid approach worked. AIG has righted itself, while paying back all the TARP money it got plus $23 billion in interest that amounts to a profit for the Treasury. The government will probably lose about $5 billion on the GM bailout, yet it still saved a company that's critical to the domestic auto industry. As for Ally (formerly GMAC), the Treasury is still about $10 billion in the hole, according to the ProPublica Bailout Tracker, but it could recoup that over time.
There has been a big cost to these bailouts, however. For one thing, they severely damaged confidence in the U.S. government and hardened the impression many people have of crony capitalists dominating decision-making in Washington, at the expense of ordinary people. The bailouts also institutionalized failure by rescuing many firms that should have gone belly up and by sparing investors who should have borne the pain of excessive risk-taking. Market discipline has been lost as a result.
If it happened again, there's a strong case that instead of the hybrid model, the government should either nationalize failed firms and treat them as government bureaucracies, or let them fail and focus on containing the damage. There are in fact new policies meant to prevent companies that are "too big to fail" from collapsing. There's also a good chance they won't work as expected. If they don't, the first principle of the next bailout should that a company that can't pay its own executives probably shouldn't exist.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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- General Motors