THE BLOG
12/01/2008 05:12 am ET Updated May 25, 2011

How Your Tax Dollars Are Paying Bank Execs Billions

Want to know where $40 billion of your taxpayer-financed bailout for bankers is going? Into the pockets of their executives. And that evidence comes straight from a hard-hitting piece in today's Wall Street Journal.

The Wall Street Journal piece is entitled "Banks Owe Billions to Executives". It is written by Ellen Schultz, one of the Journal's best financial reporters, particularly in the area of pensions; she wrote a piece more than two years ago detailing how pensions for executives, not regular workers' pensions, were a big financial drag on companies.

Here's what Schultz found:

Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

The government is seeking to rein in executive pay at banks getting federal money, and a leading congressman and a state official have demanded that some of them make clear how much they intend to pay in bonuses this year.

You may remember that banks receiving the taxpayers' largess were supposed to promise that executive compensation would be capped (well, sort of--the only thing that the legislation really said is that companies getting bailout money could not deduct the expense of high executive salaries above $500,000). The problem is this:

It's imposing some restrictions on how they pay top executives in the future, such as curtailing new "golden parachutes" and barring a tax deduction for any one person's pay above $500,000. But the rules won't affect what the banks already owe their executives or make these opaque debts more transparent.

[emphasis added]

So, basically, we are paying for a lot of obscene salaries. Here are some examples:

But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces.

The sums are mostly for special executive pensions and deferred compensation, including bonuses, for prior years. Because the liabilities include stock, they are subject to market fluctuation. Given the stock-market decline of this year, some may have fallen substantially.

Some examples: $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion to $12 billion at Morgan Stanley.

I particularly highlighted the observation that the debts to the executives--a handful of people--are more than what is owed in pensions to the rest of the company's workers. This fits in nicely with Schultz's previous piece that I referenced from two years ago that points out the burden companies have from CEO pensions. As she observes in the current piece:

Obligations for executive pay are large for a number of reasons. Even as companies have complained about the cost of retiree benefits, they have been awarding larger pay and pensions to executives. At Goldman, for example, the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million, and fully funded with set-aside assets.

This is very common. Pundits and corporate-backed politicians whine about the burden of workers' pensions but, in fact, it's quite often the case that the workers' pensions are fully funded while the executive pensions--much higher total amounts--are not fully funded.

And the executive pensions are funded more generously:

Often, it is a generous rate. At Freddie Mac, executives earned 9.25% on their deferred-pay accounts in 2007, regulatory filings show -- a better deal than regular employees of the mortgage buyer could get in a 401(k). Since all this money is tax-deferred, the Treasury, and by extension the U.S. taxpayer, subsidizes the accounts.

And executive pensions are a bigger drain on the company:

In addition, because assets are rarely set aside for executive IOUs, they have a greater impact on firms' earnings than rank-and-file pension plans, which by law must be funded.

Bank of America Corp.'s $1.3 billion liability for supplemental executive pensions reduced earnings by $104 million in 2007, filings show. By contrast, the bank's regular pension plan is overfunded, and the surplus helped the plan contribute $32 million to earnings last year.

Here are the two bottom-line reasons to make a big deal about this.

First, the Treasury bailout for bankers legislation does not prevent money being spent to pay off these obligations as part of the recapitalizing of banks. So, the rap, put out by Treasury Secretary Henry Paulson, that we should not be too concerned about this money being spent because we, the taxpayers, will get it back when assets are sold is just a lie. We will never see huge chunks of this money.

Second, and this is more important, the reason we faced the financial crisis we are in is in large part due to greed. Executives were given huge stock options as part of their obscene compensation. To get the most out of these options, the executives, particularly the CEO, always sought to push the stock price as high as possible, no matter what the risk to the company or even (see WorldCom, Enron) if they had to manipulate the financial statements or accounting reports.

This certainly included behavior in the mortgage/housing industry.

So, my friends, we are paying twice--at least--for their greed. We are paying in lost jobs, evaporated pensions and a severe recession that may last several years. And we are paying out of our pockets via our tax dollars to the executives who made this happen. Nice.