When numerous big American banks got into danger of defaulting and dragging millions of their customers with them into financial difficulties, the outgoing Bush administration and the incoming Obama administration proposed to bail most of them out. The result was the $700 billion bank bailout bill to take huge amounts of debt off the books of the most mismanaged big banks, hedge funds and pension funds.
Most Congressmen recognized the need to act swiftly to avoid further meltdowns in the financial markets. The resulting bill established the Troubled Assets Recovery Program (TARP) which originally gave endangered banks the right to submit a bid price to sell their assets to TARP as part of a reverse auction. However, it took too long to get the auction program going, so the Treasury lent $115 billion to banks by purchasing preferred stock. The bill also contained $150 billion in additional tax breaks, to be phased in over 10 years.
As should have been expected, Congress included some much-needed oversight, at least for the businesses that accepted the taxpayer-financed bail-outs. There were to be limits on executive compensation of rescued firms. Specifically, the bailed-out companies were not to deduct the expense of executive compensation above $500,000.
That provision, however, did not curb the executives’ voracious appetite for “rewards.” They still could have their boards vote them bonuses of unrestricted size. And that they did. This year, compensation will again take much of the revenue of big business.
During the first three quarters of 2009, Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase, and Morgan Stanley--five of the largest recipients of federal aid--together earmarked about $90 billion for compensation. That figure includes salaries, benefits, and bonuses. At several companies, however, bonuses make up more than half of executive compensation, according to The New York Times.
Goldman Sachs, for example, is expected to pay each of its employees on the executive level an average of about $595,000 for 2009; JPMorgan about $463,000. That does not include private jet travel, lavish conferences, country club fees, and other so-called “benefits.” Goldman Sachs’ CEO Lloyd Blankfein had the nerve to tell a Congressional committee that "The compensation always correlated with the results of the firm." (In 2007, Blankfein was paid $68 million, but he did not receive a bonus in 2008.)
The apologists for those outrageous bonuses obviously fail to see that most of the banks’ profits, this year in particular, belong to the shareholders and to the taxpayers who made the bail-outs possible. Usually, bonuses are taxed at the same rate as regular income. Instead of the normal withholding rate, however, an amount equal to 25 percent of the payment is withheld for Federal income taxes.
President Obama who signed the bail-out legislation is now also responsible for getting the taxpayers' money back from the bailed-out businesses. So it certainly is a very modest demand when he proposes a tax of 5 percent on bonuses and profits totaling roughly $180 billion a year. Why should banks that take government money not accept reasonable rules to govern their otherwise reckless conduct? After all, such rules are standard procedure for all Americans on any kind of public aid.
While most fat cats characterize any tax on excessive profits as a curtailment of free enterprise, an apparent majority of the American people is justifiably appalled at their insensitivity. Republican Senate Minority Whip Jon Kyl rightly blamed the "tone deaf" bankers for creating the political environment that causes Congress to consider remedial action against profiteering at a time of worldwide economic distress.
Remember, the pledge of allegiance I recite every week at my Rotary Club demands not only liberty but also justice for all!