When Will the White House Wake Up?

Sam Pizzigati

Congress may be gridlocked, but the Obama administration has the power, even without congressional action, to take on the CEO set — and the windfalls that are so enraging average Americans.

A year ago, movers and shakers at the upper echelons of the Democratic Party were celebrating the biggest congressional majorities for Democrats in a generation. Last week, in those same upper echelons, gloom and doom were reigning.

The immediate source of the unease: the surprise announcement that Senator Byron Dorgan from North Dakota, a popular Democrat in a heavily Republican state, would be retiring at year end.

“Substantial” Republican gains in the 2010 congressional elections, pollsters predict, now appear “almost inevitable.” In some polling, the right-wing “Tea Party” movement is posting higher favorable numbers than the Democrats.

That Tea Party movement, notes labor analyst Les Leopold, is expressing “the fury of Americans who have watched the financial elites rip off the economy, then crash it, then cash in on government bailouts, and then commence to rip off the economy all over again.”

Every week’s headlines only seem to feed that fury even more. Last week, for instance, brought the news that Citigroup, the biggest bailed-out bank, handed its investment banking chief, John Havens, a $8.97 million payday on December 30. In all, four other Citi execs walked off with over $8.5 million last year. Citi is still holding 25 billion in U.S. taxpayer dollars.

Or how about H. Edward Hanway, who retired December 31 as CEO of the health insurer giant Cigna? At the start of Hanway’s last year as CEO, Cigna announced plans to ax 1,100 jobs. The company then went on to post a $208 million first-quarter profit. Hanway took home $12.2 million in 2009. He started his golden years last week with a retirement bonus worth $73 million.

But last week’s biggest stunner may have been the revelation that, back in 2008, the New York Federal Reserve Bank directed AIG, the tottering insurance company, “to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis.”

What details? Banks like Goldman Sachs had “insured” their risky investments by cutting credit default swap deals with AIG. Goldman stood to lose $13 billion if AIG couldn’t pay off those swaps. But AIG did pay off every last one, at 100 cents on the dollar, by using bailout tax dollars.

In essence, the U.S. Treasury was laundering tax dollars to Goldman and other big banks via AIG, and the New York Fed — by instructing AIG not to reveal those outlays — was trying to cover up all the laundering.

The New York Fed’s top official during all this? Timothy Geithner, the current Treasury secretary.  

At Treasury, Geithner has continued to keep Wall Street’s most eminent most comfortable. Last year, he pushed back repeatedly against any attempt by Congress to place meaningful bailout strings on banker pay. And the bailout “pay czar” he oversees, Ken Feinberg, has essentially decided that if bankers get paid millions in stock instead of cash, that counts as reform.

More serious efforts at reform, in the meantime, remain bottled up in congressional gridlock. The occasional tough-minded pay-limit measures that have passed the House have all lost steam in the Senate. The White House, amid this inaction, has come across as out of touch — with ordinary Americans.

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President Obama’s “kid-gloves treatment of the bankers,” as economist Paul Krugman observed last week, has placed “Democrats on the wrong side” of the “populist rage” now building throughout the country.

“If congressional Democrats don’t take a tough line with the banks in the months ahead,” Krugman adds, “they will pay a big price in November.”

But the President doesn’t have to wait on Congress. His federal agencies, right now, have the authority and the capacity to start clamping down on executive pay excess, even without congressional action.

At the FDIC, the federal agency that insures bank deposits, officials have started making some tentative steps in that direction. All banks pay fees to the FDIC, and banks that engage in risky practices that make bank failure more likely pay higher fees.

Up until now, the FDIC has never considered excessive bank executive compensation a practice that endangers bank stability. But the FDIC, according to news reports, may be about to change course and define pay excess as a reckless practice.

The IRS, argues an analysis forthcoming in the Yale Law Journal, could take a considerably more sweeping step against that pay excess — just by treating publicly traded companies “the same as their privately held counterparts.”

The U.S. tax code, the analysis author Aaron Zelinsky points out, currently lets businesses deduct off their taxes “a reasonable allowance for salaries or other compensation.” But the IRS has essentially only applied this reasonableness standard to privately held companies.

At such companies, the assumption goes, unscrupulous executives could pay themselves fortunes and avoid corporate taxes by deducting those fortunes on their corporate tax returns.

At publicly traded companies, the IRS assumes, boards of directors accountable to shareholders serve as a check against this sort of unscrupulous executive behavior. In real life, of course, corporate boards don’t check. They rubberstamp.

IRS blindness to this reality lets excessive executive pay grow and fester.

“Small fry at privately held companies, earning relatively small sums of money, can lose the corporate deductions for excessive executive compensation,” points out Zelinsky, “while CEOs of much larger corporations face no similar rules or penalties.”

By simply ending this double-standard, by beginning to subject big-time executive pay to a “reasonableness” test, the IRS could deny major corporations tax deductions for over-the-top executive pay.

Any IRS ruling that a corporation’s executive pay has become unreasonably excessive would also subject corporations to big-time negative publicity — and give dissident shareholders valuable ammunition for firing away at pay excess.

The White House could make all this happen, without any action needed from Congress. The White House, in short, has the wherewithal for attacking the windfalls at the top that so anger average-income Americans. Does the White House have the will? That may prove this year’s most important political question.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

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