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Obama's Pay Cuts Let Big Boys off the Hook

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You knew this was coming. The Obama administration had to come down hard on the companies that received the most obvious bailouts -- Bank of America Corp., American International Group (AIG), Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial. They had to do something to show they were not Wall Street patsies.

Unfortunately, the administration doesn't have the moxie to go after the most outrageous salaries and bonuses that are about to flow. First they let Andrew J. Hall, the oil speculator, escape from Citigroup so that he could receive his $100 million from his new employer, Occidental Oil. No one has yet provided an explanation for how he "earns" his money and what value he contributes in exchange for his speculative gains. It seems his riches flow from helping to raise oil prices for the rest of us. Why should he receive his bounty? Had Citigroup not been rescued by the taxpayer, Mr. Hall would have been just one more creditor waiting on line to get pennies on the dollar. Instead he's going to get it all, now that he's been allowed to move out of plain view.

Also in plain view are the dons at Goldman Sachs, JP Morgan Chase and Morgan Stanley who are going to get big fat bonuses that also derive from taxpayer welfare. Our bailout of AIG saved their butts. In fact, when the government allowed AIG to pay out its credit default swaps in full to these "profitable" banks, it poured $13 billion of booty directly into the bottom line of Goldman Sachs alone. Each of these banks is also benefiting from a wide variety of additional, below-the-radar government programs that provide them liquidity, guarantees for their bonds, and support for their toxic assets.

This was a chance to slap a "President's Wage Cap" on the entire financial sector: no one earns more than the President of the United States until the unemployment rate goes below 5 percent. But the President and Congress blinked.

More importantly, the administration is reinforcing the myth that there's a relationship between Wall Street's outrageous pay packages and their economic worth. But, no economic theory (human capital theory, supply and demand, winner take all etc.) can justify in terms of efficiency why a bond trader earns 100 times more than a brain surgeon or 1,000 times more than a research scientist. That's because there is no connection between Wall Street's pay and real economic worth. They get their money because we have allowed them to create a vast fantasy finance casino. They get to bet with other people's money, lots of it. When they win they keep the profits. When they lose we bail them out.

Worse still, by allowing the fantasy finance casino to continue to pay outrageous sums to its croupiers, we do absolutely nothing to put our unemployed neighbors back to work. Everyone knows that the "profitable" financial firms are not moving money into the real economy. Everyone knows that their billions are not creating new jobs and industries in this country (outside of a few square miles of lower Manhattan).

I fear the White House is tacitly endorsing the ideology put forth this week by Goldman Sachs analyst, Brian Griffiths who frankly said, "We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all."

Been there, done that -- for the past thirty years! As I argue in The Looting of America, Mr. Griffith's theory failed spectacularly. His beloved inequality is at a record high and so is unemployment. The last time it was this skewed was 1929. That's not an accidental correlation. Excessive wealth in the hands of the few creates the demand for speculative investments. Deregulated finance creates the supply of fantasy finance instruments to suck up that excess capital. Severe crashes become inevitable. By not attacking the skewed distribution led by Wall Street's ridiculous pay packages, we are setting up the conditions for the next crash.

No, I'm sorry. I can't get excited about cutting the pay of a GM pension fund manager making $2 million, while we allow the biggest gamblers to walk off with tens of millions as 29 million of us are unemployed or underemployed.

Welcome to the billionaire bailout society.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.