The Bailout - Call to Action

Eva Rosenberg, MBA, EA - Last night you heard President Bush explain economics 101 to us. I really appreciated that lesson, especially as the economy (or so we are being told) is on the verge of collapse. Isn't this something he should have been explaining to our legislators and oversight committees during the last several years?

Actually, Bush's demand for a bi-partisan solution and a command appearance at the White House today by both McCain and Obama was a good move.

Personally, one of the things (among the many) that disturbs me about all this is - shoving all this down our throats demanding an instant decision to accept this incredibly major committment of resources.

Those of us who do our due diligence with respect advice sought by our clients would normally advise them, "When someone brings you a deal and insists you sign it RIGHT NOW, with no time to examine it too closely or to research it - walk away. There's something gravely wrong with that deal." Isn't that what you tell your clients?

Earlier this week, I heard Senator Clinton on the radio expressing the Senate’s demands to offset the instant, massive bailout the President and the Fed wants the Senate to pass. The big issue Clinton raised was a limitation on salaries for the top executives of the companies benefiting from the bailout.

Whew, when you listen to wages or compensation packages of the top corporate officers - $28 million, $15 million, $10 million and more, your head reels. According to BusinessWeek, average total pay for a CEO at one of the 500 biggest companies last year was $12.8 million, double what it was a decade ago.
BusinessWeek goes on to say a Senate discussion draft would require the government to ban incentive payments that the agency considers "inappropriate or excessive;" require executives to return incentives "based on earnings, gains, or other criteria that are later proven to be inaccurate;" and limit severance as "appropriate to the public interest" and the assistance the company receives.

They are being compensated for generating short-term profits and feeding the stock price frenzy on a moment-to-moment basis, rather than for establishing long-term profits and laying the groundwork for the solid health of the companies under their charge.

I guess I just don’t understand this. Do you?

Or perhaps I do. In MBA classes they teach about the glory and financial astuteness of business machers who would buy up functioning companies, strip them of their most valuable assets, sell the separate units, often laying off the workers and putting entire towns out of business. They were held up as role models. (Have you ever seen Cash MaCall?James Garner’s character at the beginning of the film was modeled after those folks.)

A long time ago, I read a John Pierpont Morgan quote that the president of the corporation’s compensation should not be more than 34 times that of the lowest paid worker in the company. (I can’t find that quote anywhere now.) At the time, that may have seemed quite greedy and outrageous. Today?

Let’s following that formula today, assuming that the lowest paid employee in the 500 biggest companies gets paid $20 per hour. The top executive’s compensation would be limited to $1,414.400 per year. Hey, that’s not bad. There’s no reason for someone not to be able to live on nearly a million and half dollars per year, is there?

In fact, under IRC 162(m)) , publicly-held corporations may not take a deduction for over $1,000,000 in annual compensation per top executive. That’s a nice, round number.

Of course, immediately following are loopholes for commission and performance-based compensation. Any one of us can write up performance targets that any CEO could reach without breaking a sweat. After all, the performance can be based on achieving short-term goals that help the executive’s division, or branch, rather than the entire corporate body – and there is no provision that the target is something that protects investors in the long-run – or even for the result to cause increased dividends.
The House proposal seems to require compensation limits for two years after the bailouts. For $700 billion dollars? Heck, I’d like to see the limits stay in place until the taxpayers are repaid the full $700 billion, plus reasonable interest. Wouldn’t that make more sense as a rational business contract?

Personally, I'd love to see a compensation limit of no more than $2,000,000 for anyone in a publicly-held company that receives bailout money - until the money is fully repaid, including interest. Naive, perhaps? But really, anyone who needs more than $80,000 per month (after taxes) to live on, really needs to take another look at their spending habits!

Remember the bailout money is coming from US. From taxpayers like you and me and our clients. These bailouts should be loans – designed to be paid back. Anyone game to start a rapid and intense campaign to insist on the wage limits until Americans get their money back?

You can reach your legislators and executive branch right here:
http://taxmama.com/Articles/calltoaction.html

P.S. Incidentally, how do you feel about having the government own a piece of these businesses? That’s a scary thought. It smacks of nationalization.

In the last 8 years, we’ve lost a host of personal freedoms. We are subject to search and seizure without any right to protest or have an attorney present – or even to be released for months at a time. We are forced to endure endless lines at airports and other key transportation venues (even though there’s evidence the TSA staff aren’t paying attention to what gets past them), getting in and out of government buildings takes nearly as long, our phone calls and Internet messages are universally tapped without any judge’s approval – and now, we’re going to nationalize our top companies? Why isn't EVERYONE screaming 'ENOUGH! I'M NOT GOING TO TAKE THIS ANY MORE!"?

If this weren’t America, what would that description sound like? The Soviet Union of the 1950s and 1960s?

Just keep allowing our freedoms to erode – and pretty soon, 1984 will be here.

Let’s talk our legislators out of nationalizing the companies. The bailouts should be structured as debt – secured or preferred, so it cannot be bankrupted or discounted. The U.S. Government should not have equity in these companies.

And if you have any other constructive ideas, please, do post them here - and/or pass them along to your legislators.
http://taxmama.com/Articles/calltoaction.html

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Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

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