Use Executive "Clawbacks" to Fund Street Bailouts

Published: Mon 29 Sep 2008 12:06 AM
Use Executive "Clawbacks" to Fund Wall Street Bailouts
The executives of any firm receiving Great Wall Street Bailout proceeds from the government should be subject to clawback of executive incomes.
By Michael Thomas
Since the early seventies, the billionaire plutocrats and the Wall Street Masters of the Universe have succeeded in capturing essentially all of the gains in productivity and GDP that the economy has created, converting them into their personal wealth. The era of nine-digit corporate compensation and ten-digit hedge fund manager earnings has resulted in the greatest economic inequality since the Gilded Age. The individuals occupying the top one percent of our economy earned 21.8 percent of the nation’s income (2005) and, according to The Nation, hold $16.8 trillion in wealth, $2 trillion more than the lower 90 percent of Americans combined, so I will refer to these plutocrats and Masters as the One Percenters.
The golden days of the One Percenters were made possible by relentless deregulation of the financial markets and the economy beginning in the seventies and by “starving the beast” of government through enormous tax cuts on the earnings and wealth of One Percenters, which rendered increasingly ineffective any residual government oversight of the economy. During the same period, economic security for the middle and working classes has been subject to ferocious erosion, with job security, pension security and assured upward mobility distant memories of better days, lost to the dynamics of the global marketplace and the vagaries of Wall Street. The result is that median real income for the rest of us is at essentially the same level as in the early seventies and has fallen during the Bush Administration.
Now comes the Great Wall Street Meltdown. The same balance sheets from which One Percenters have been skimming the nation’s wealth with fewer and fewer regulators looking over their shoulders have somehow been rendered indeterminate, incapable of even determining whether they are in balance. And so now they run to the government and the taxpayers and the little guys, whose real incomes have been frozen for nigh onto forty years, to bail their balance sheets out.
The One Percenters want bailed out to the tune of $700 billion to $1 trillion, which will be added directly to the federal deficit, already bloated by the $1 trillion off-budget Iraq war borrowing and the cost of the rest of the workaday Bush mismanagement and corruption. Already we are being told that the next president will have no money left over after the bailout to fund any other programs, like health care, education, alternative energy development, or rebuilding the nation’s infrastructure. So we, the little guys, must forego the badly needed repairs to our tattered national well-being so the One Percenters can straighten out their balance sheets?
In the venture capital world, which prides itself on being a dog-eat-dog red meat capitalist world, there is a mechanism, with the suitably gruesome name of “clawback”, to deal with circumstances akin to these, where the active investors, in this case the One Percenters, have themselves fed fully at the trough during the good days but in a downturn are unable to meet the investment expectations of those whose resources funded their earlier feasts. During the bursting of the bubble, clawbacks made numerous ugly appearances at VC firms when “sure-thing” business plans failed to “monetize” their flaky business plans. When a VC company’s portfolio of companies was revealed to be duds, the investors in the VC company had the right, and did in fact exercise the right, to clawback, i.e., be refunded a portion of, their investments from general partners, requiring the general partners to forego their management fees for the current year, and even give back previous years’ annual bonuses (!) if necessary, to meet the clawback obligations from their own pockets.
In the Great Wall Street Bailout, the One Percenters have been taking their shares of the profits for years through hedge fund management fees, exorbitant executive compensation, self-dealing stock-option plans, huge year-end bonuses and other ingenious ways of wealth extraction far too clever for the likes of me to be aware of. Clawbacks should be used now to fund the Great Wall Street Bailout of 2008. The bailout should be funded by clawbacks from the winnings of the One Percenters in the casino games they have rigged in recent years on the conveniently unregulated Wall Street. They should be made to disgorge the losses of the injured parties out of their own pockets just like VC general partners.
In particular, the executives of any firm receiving Great Wall Street Bailout proceeds from the government should be subject to clawback of executive incomes, management fees or stock options for the prior seven years, to the extent necessary to fund that company’s bailout. A more generalized form of clawback would be to tax retroactively the types of firms receiving bailouts or the types of financial activities engendering bailouts in amounts sufficient to fund the bailout program. More general than that would be a retroactive clawback tax on One Percenters as a whole in amounts sufficient to fund the bailout program.
Middle class taxpayers should not be made to pay a single dime of the cost of these bailouts. And, the clawbacks should be sufficient to assure that the deficit is not increased one penny by the bailouts so that the urgently needed repairs to our nation’s physical and social infrastructure can be made by the next president.
E. Michael Thomas is an attorney practicing in Framingham, Massachusetts who has worked with and venture capital firms. He also practices environmental law where the “polluters pay” principle is used to cleanup environmental disasters. Email: and Website:

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