After having seen millions of jobs lost and trillions of retirement savings erased because of the financial crisis, Americans were outraged to learn that Wall Street firms paid out more than $18.4 billion in cash bonuses in 2008, the sixth largest bonus pool on record.[1] Even more shocking, many of these Wall Street firms had just received billions in taxpayer money to help prevent their collapse.

For years, CEOs have justified their high compensation as being “pay for performance.” But for Wall Street, the promise of high annual payouts without the need to worry about long-term consequences created incentives to pursue such unsustainable business practices as using short-term borrowing to invest in mortgage-backed securities. Wall Street pay packages encouraged executives to take risks their firms could not support. Now American taxpayers are on the hook for these bad decisions after Wall Street executives reaped inflated pay during the bubble years.

For example, in 2007—the year the financial crisis began to unfold—the top 10 recipients of the federal government’s Troubled Asset Relief Program (TARP) collectively paid their CEOs a combined $242 million in total annual compensation. That averages nearly $25 million per CEO to run companies that might have gone bankrupt if not for billions of dollars in taxpayer assistance.

CEO Pay at the Top 10 TARP Bailout Recipients

The managers of the unregulated private firms that form a "shadow banking system," who are even more highly compensated, have also benefited from the government intervention in the financial system. The 25 top hedge fund managers made $11.6 billion in 2008. John Taylor, a hedge fund manager at FX Concept and ninth on the list, was candid about the value for his fund of the government bailout: “Thank God for the government, because if they hadn’t intervened, we wouldn’t have had anyone to trade with.”[4]

In a recent report, the Congressional Oversight Panel reviewing TARP recommended the shadow banking system be brought under federal regulation.[5]

While Wall Street has been paying itself large bonuses both directly and indirectly subsidized by taxpayer bailout money, homeowners have received little federal assistance to help prevent foreclosure. In the first five months since the federal government’s HOPE for Homeowners program has been in effect, the plan has helped only a single homeowner avoid foreclosure—largely because lenders have refused to participate.[6]

Government Efforts to Limit Executive Pay Have Been Ineffective

The $700 billion TARP bailout plan was created by the Emergency Economic Stabilization Act of 2008. As a condition of receiving aid, TARP participants are not allowed to offer pay incentives that encourage “unnecessary and excessive risks” by senior executives, may not pay golden parachutes and must adopt claw-back provisions for any executive pay based on inaccurate financial statements.[7]

However, these executive compensation limits did little to protect taxpayers from subsidizing excessive bonuses. For example, Merrill Lynch accelerated its 2008 bonus payments just before it merged into Bank of America, which then received $20 billion in TARP aid to help complete the merger.[8] American International Group (AIG)—now nearly 80 percent owned by U.S. taxpayers—granted millions in incentive bonuses to its financial services unit that was largely responsible for the company’s collapse.[9]

Congress again tried to limit executive pay in the American Recovery and Reinvestment Act of 2009 by restricting TARP recipient executive bonuses to one-third of total compensation and requiring TARP recipients to submit their executive compensation plans to an advisory vote by their shareholders.[10] The U.S. House of Representatives responded to the AIG bonus payouts by voting for a 90 percent surtax on bonuses for anyone making more than $250,000 at any company that has received more than $5 billion in TARP aid.[11]

Unfortunately, the current plan to save banks—in which the government buys toxic assets using just a modicum of private money—may serve to further enrich executives and financiers at private and public companies alike. According to Nobel Laureate economist Paul Krugman, the plan works like this: “Taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.”[12]  Economist Jeffrey Sachs has called the plan “a thinly veiled attempt to transfer up to hundreds of billions of dollars of U.S. taxpayer funds to the commercial banks.”[13]