How to Keep Bailed-Out Managers Honest

By Bartlett Naylor

What’s snagging negotiations about the massive coronavirus pandemic aid package is ensuring that the trillion-plus aid goes to working Americans and not to line the pockets of profiteers. That will be key to the effectiveness of Washington’s response to the coronavirus crisis.

The Senate GOP bill has little oversight. President Donald Trump said he’d “be the oversight.” Gag me.

The Pelosi draft HR 6379 contains important oversight: a council of inspectors general to combat abuse of monies, a bipartisan committee to oversee financial markets, and more.

Here’s another idea: Put the paychecks of senior executives of bailed-out firms on the hook. Specifically, require that 50 percent of the pay of all executives receiving more than $1 million at aided companies be deferred. That amount would go into a pot at the aided companies. Then, if the company is found guilty of misconduct, from misuse of the aid monies or any other infraction (money laundering, consumer abuse, price gouging, lying to shareholders, product safety violations), then any fine this company pays would be paid from this pot.

This makes all senior managers police their own firm. All managers will look over the shoulders of their colleagues to make sure they’re honest. Because if they’re not all honest, all their pay will be docked. By targeting managers paid more than $1 million, no one can complain that about docking the pay of an honest line worker for the sins of any of her co-workers. (And frankly, why should any manager of a taxpayer-aided firm be paid this much?)

Currently, when oversight agencies or the U.S. Department of Justice fine corporations, shareholders effectively pay the fines. Executives don’t face any personal liability. Infamously, Wall Street shareholders paid more than $240 billion in fines for misconduct by bankers who caused the 2008 crash; no senior executive spent even one night in jail. Again, shareholders paid the fines. Wells Fargo’s CEO walked away with more than $100 million in severance following the fake account scandal.  Shareholders paid Wells Fargo’s billions in fines.

In the case of misconduct by aided firms, it will be taxpayers who are providing the billions in aid that pay the fines. Yes, if the airlines defraud the taxpayers and face fines, taxpayers will be paying the fines.

Instead, senior managers should pay those fines. They’re the ones responsible for the conduct of the firm.

This isn’t a radical idea. When many Wall Street firms operated as partnerships, such as Goldman Sachs and Lehman Brothers, partners paid the fines for misconduct out of monies that otherwise would have gone to the value of their partnership. In the late 1990s when these firms became public companies, selling stock to the public, that’s when misconduct seemed to supercharge. Executives were paid based on short-term stock price gains, and misconduct fines were then covered by monies that might have gone to shareholder dividends. As one insider observed, they went from long-term greedy to short-term greedy. And they delivered the fraud-fueled 2008 financial crash.

This idea already exists in various legislative forms. For example, HR 3885 applies the model to banks. In HR 4320, U.S. Rep. Katie Porter (D-Calif.) proposes that all companies adopt this for their top five officers, or explain why they don’t.

This idea originally came from then Federal Reserve President William Dudley. Alas, the effort to win real pay reform following the 2008 financial crash foundered amid relentless pressure from the 3,000 Wall Street lobbyists who troll Washington. Even the mandatory provision in the 2010 Wall Street Reform and Consumer Protection Act, which requires pay reform rules effective by May 2011, remains ignored.

Congress should approve this pay reform now, when all Americans insist on sensible measures to ensure that taxpayer funds go to workers, not profiteers.