Privatize Profit, Socialize Loss: Commentary On The Proposed Wall Street Bailout

That headline, in a nutshell, is the foundation of the Bush Administration's "breathtakingly awful" plan to bailout troubled Wall Street firms.

If you doubt the "profit" part, let me introduce you to Glen Pizzolorusso, featured on This American Life in May. Pizzolorusso, a sales manager ("living the live of a B-list celebrity") for WMC Mortgage in upstate New York, was making $75,000 - $100,000 a month. (At the time, WMC was owned by GE.)

Pizzolorusso's firm made "bad loans," "liar's loans" like NINA loans, loans that would be bundled and resold and known among industry insiders as "toxic waste." He sold crap but made more money in a month than the average American household makes in a year.

Pizzolorusso knew he was in trouble, he said, when his income dropped to $25,000 a month. Note: this is upstate New York, not Manhattan, and while institutions like Pizzolorusso's made out like bandits, it was nothing like the masterminds on Wall Street.

Don't get me wrong. Bush's Treasury Department doesn't want to protect Pizzolorusso: he's just a worker bee. They're objecting to restricting the salaries of the people -- executives -- who hired people who bought Pizzolorusso's crappy loans even though we're putting the power of the US treasury behind those incredibly poor business decisions. A mathematical gamble made on the assumption that home values always rise. Obviously, these guys didn't look at housing values in the 1980s.

Barclays and Lehman Brothers
To give you an example of executive pay, in London, citizens are "furious" that Barclays Bank established a "bonus pool" worth $2.5 billion for "up to 10,000 staff at the New York office of the bankrupt investment bank Lehman Brothers."

A bonus pool valued at more than the cost of the firm? Barclays paid only (cough) $1.75 billion for Lehman Brothers. But even though the firm went down in flames, "Barclays is also in negotiations with about 30 executives it considers to be Lehman's best assets and plans to offer them contracts worth tens of millions of dollars." For example, Richard Fuld, Lehman's CEO, was paid $34.4m last year. Why would anyone want to rehire the CEO of a firm that for all-intents-and-purposes went bankrupt?

At the same time, "[the] September wages of thousands of [Lehman's] European staff were only secured in the middle of last week, when [PricewaterhouseCoopers (PWC)] negotiated a £100m loan to fund the payments."

Yes, Barclays is a private bailout. And a foreign one, at that. But it reflects an attitude towards compensation -- and its protection -- that certainly won't play on Main Street.

AIG, Fannie Mae and Freddie Mac
A domestic example: the AIG CEO turned out in June got a $47 million exit package (also known as a "golden parachute"). His successor, Robert Willumstad, turned down his $22 million exit package; he said in an email that "it wouldn't be right for him to keep the money when so many shareholders and employees had lost money."

After the Fed took over Fannie Mae and Freddie Mac, it denied "millions of dollars in severance" (exit packages) to their CEOs. So why hasn't the Bush Administration included this requirement in its broader bailout plan?

It's Main Street that will be paying for these bailouts for decades to come. And Main Street that will be determining who next sits in the White House. So it's no real surprise that both the McCain and Obama campaigns have issued statements supporting executive compensation limits.

What You Can Do
Call your federal legislators -- Senate and House. Tell them what you think about the bailouts and executive compensation. The Bush Administration wants to fast-track this bill, and Congress wants to recess this week so they can go home and campaign. So call today.