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Sep 24 / Jonathan

Kick top management in the teeth

Thus Dean Baker.

Leonhardt is Wrong, Limiting CEO Pay is Not a Sideshow to This Bailout

In his weekly NYT column, David Leonhardt argues that limits on executive compensation are a sideshow to the bank bailout. Actually, they are an essential part of the story.

A key issue in the bailout is addressing moral hazard. The message to Wall Street should not be to get rich on fees from stupid loans and then run to the big government to save your rear when the loans go bad. We give this message to the shareholders by saying that we are going to own much or all of your bank if you come to us for help.

It is necessary to give a similar lesson to the CEOs. A major problem in corporate America is that top executives have been able to pillage their corporations at the expense of shareholders. This problem is nowhere worse than on Wall Street, where high level executives (not just CEOs) routinely earn tens of millions annually in compensation, and sometimes hundreds of millions.

It is therefore crucial that the CEOs also be forced to take big hits in this sort of bailout. Otherwise, their incentive is to rip off their shareholders in the good times with irresponsible lending policies (thereby getting huge fees) and then have the government kick the shareholders in the teeth in the bad times, but they themselves can escape unscathed.

In short, kicking the top management in the teeth as part of the bailout is both a necessary part of the bailout and good policy for stemming the growth in inequality over the last three decades.

—Dean Baker

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