Will the Bailout Help You?

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The solution, then, is not to place limits on executive pay. Rather, Congress should craft a retroactive "robber baron" tax, designed to punish -- yes, punish -- Wall Street financiers and CEOs who made tens of millions of dollars in salaries and stock options and now stand with their hats in hand. As Tom Peters noted at the Inc. 500 conference. The severance, though, was just the beginning: it came on top of $140 million in cashed out stock options, $12 million in salary from 2003 to 2007, and $57 million in bonuses from 2003. (Mercifully, the bonuses stopped after 2005.) All told, that's at least $319 million. The robber baron tax should be steeply progressive, perhaps starting at $2 million -- someone who made $10 million should be paying a higher rate than someone who made $5 million, and someone who made $50 million should be paying a bigger share still. For someone making $319 million, an effective tax rate of, say, 90 percent seems almost about fair.

The retroactive tax should be finely enough tuned so that not everyone who made outrageous sums of money in the last five years should be liable for it -- there are ways to target specific kinds of income. It ought not target Inc.'s readers (though I'm guessing very few would qualify for this retribution) or our most popular celebrities, for example. But in general, everyone in the capital class should shoulder some of the obligation here. That some can insist in one breath on shoring up the markets with taxpayer money and in the next breath insist on maintaining low tax rates on the very wealthy is not quite as offensive as Angelo Mozilo's payout, but it's offensive enough. (And it is not likely to win the day in 2010, when the Bush tax cuts expire.)

The legislation should more closely balance the interests of homeowners and banking institutions. It could, for example, follow a cue from John McCain. In the debate Tuesday night, the Republican presidential hopeful proposed that the Treasury spend $300 billion to buy home loans directly and renegotiate with the borrowers. The current legislation makes a feint in that direction, but it's nothing more than that. Here's the passage that relates to "Foreclosure Mitigation Efforts:"

To the extent that the Secretary acquires mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program ... or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

The Secretary will "encourage" and "may use" -- Congress isn't exactly aiming the big guns here. The HOPE for Homeowners Program was included in the bill that granted the government authority to rescue Fannie Mae and Freddie Mac, but it is strictly voluntary on the part of lenders and servicers, and likely to help at most just 400,000 of the millions of homeowners likely to lose their homes. Those who argue that it's a mistake to encourage inflated home prices have a point, but it is surely possible to devise a plan that keeps homeowners in homes with values that have been adjusted downward. If taxpayers are ultimately going to have to write a check to someone, maybe it should be for the difference in the book value of mortgages that would otherwise go into foreclosure and the market value of those houses today.

Last week our elected leaders failed us. Not because they didn't immediately pass the bailout -- as some commentators would have it -- but because they didn't use the two weeks they had to come up with something more meaningful. We can only hope they do not make that mistake again.

¹One somewhat abstracted indicator did take a turn for the worse. The so-called TED Spread, which measures the difference between the interest rate of short-term U.S. Treasury Bills and the rate for short-term interbank loans, is often used as a benchmark for perceived credit risk in the economy. (T-Bills are considered risk-free.) For the last several years, until September 2007, the TED Spread never reached one percent (and seldom topped 50 basis points). It spiked in mid-September 2008, and reached a new high of 3.5 percent the day the House voted down the bailout bill. It fell slightly the next day, but then began coursing upward, and on Friday, after the House reconsidered, closed at almost 3.9 percent, an all-time record.

²It didn't hurt that the Senate larded the bailout with tax breaks. Only 113 of the bill's 451 pages are taken up by the bailout. The remainder detail giveaways for "motorsports racing track facilities," Hollywood producers, and makers of toy wooden arrows, among many others -- $100 billion that in the context of the current environment simply adds insult to injury. And I say this as someone sympathetic to the renewed renewable energy incentives that are included.

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