How to reward taxpayers who bailed out Wall Street
On Sept. 19, 2008, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke convened a conference call with the Democratic caucus of the U.S. Senate. We were starkly told that the liquidity of our financial system was frozen by a plethora of toxic assets and that if we did not immediately appropriate $700 billion the world economy would, within weeks, descend into a cataclysmic free-fall.
Ten days of frantic briefings and negotiations followed. I talked with people across the philosophical spectrum and heard conflicting advice, but the bottom line was: The crisis is real. On Oct. 1, 2008, the Senate voted to fund the Troubled Assets Relief Program (TARP).
I decided to vote favorably after being reassured by Senate Democratic leaders that we would examine excessive executive compensation, work to reregulate the financial sector and include the American taxpayer on the upside of any recovery.
The financial sector recovered rather quickly, but not without a vast amount of help.
The time has come to include taxpayers in the rewards of a recovery that would never have happened without their money.
Billions of dollars in bonuses paid recently to financial-sector executives are a direct result of the TARP bailout and generous Federal Reserve policies constructed during the crisis. These firms have had toxic assets removed from their balance sheets and have benefited from interest rates near zero as the Federal Reserve opened its "discount window." A July 2009 report to Congress indicated that the guarantee of support from the Fed was in the neighborhood of $6.8 trillion. In short, the top-tier managers in these companies had enormous backup from taxpayers.
As we are all painfully aware, this economic crisis wiped out jobs, assets and retirement accounts. It is not fair, as we pick up the pieces, that our middle class is the last to be made whole.
Recognizing this, I offered a one-shot amendment to recent "tax extenders" legislation, designed to give taxpayers a place on the upside of the recovery of the financial system that they so clearly enabled. This amendment, which Sen. Barbara Boxer principally co-sponsored, provided for a one-time 50 percent tax on bonuses in excess of $400,000 paid to executives of Fannie Mae, Freddie Mac and any other financial institution that received at least $5 billion through TARP. The tax would apply only for the excess amount of the bonuses (and not on basic income) of monies earned in 2009 and compensated in 2010. At a time of huge deficit spending, this "fairness tax" would recover $3.5 billion to $10 billion.
After predictable lobbying by the financial sector, the amendment was not even allowed a vote on the Senate floor. Why? Because this issue, like others involving true economic fairness, is political poison. Voting in favor of a "windfall profits" tax, however narrowly defined, incurs the wrath of key political donors. But voting against it would increase the anger of working people who know they are not being fairly treated. And so, after a bit of political hand-wringing, the issue disappeared from view.
I do not favor recurring taxes on windfall profits. They are usually difficult to define in a rough-and-tumble economic culture designed to reward inventiveness and the willingness to take risks. But this situation is different. The risks were mitigated, if not eliminated. There is no risk or inventiveness to reward. These executives got lucky, to the exact degree that our middle-class taxpayers got the shaft.
Entrepreneurial risk-taking is an engine for growth in our economy and should be justly rewarded. But our middle class, which seldom has direct access to power, deserves the full protection of our leaders. In this case, bailed-out executives should be eternally grateful that they are receiving not only full compensation but also extremely generous bonuses. And our political leaders should have the fortitude to require that bonuses in excess of $400,000 be shared with American workers who may not even own stock but who were required to invest their tax dollars into TARP to stabilize the economy.
The writer is a Democratic senator from Virginia.