Since February 2008, the United States has spent $1.636 trillion in bailouts and tax refunds. Where this money is coming from should be a source of concern for all of us, and if we add in the proposed Obama bailout program (the House last week passed an $819 billion version), the total could rise to $2.461 trillion of our money. There is a great deal of mythology around what these bailouts are and what they have done. We have not had any reporting or accountability about the impact of several of these actions (Bear Stearns, the $300 billion mortgage guarantee and the funds made available to FannieMae-Freddie Mac). What have these proposals achieved and what has been their impact on the economy?
Let us look at five myths that surround the major $700 billion bailout of 2008. First, it is believed that it had strong accountability provisions. The $700 billion bailout was passed by Congress in five days and was more than 450 pages long. This is 5 percent of our total output and more money than that spent in Iran. OMB Watch noted that “Congress would be wise to ensure that significant oversight and accountability structures are in place. Without attaching strings to a bailout, Washington would place an additional $2,000 of debt on the shoulders of each man, woman and child in the country while encouraging the foolish and greedy decisions of Wall Street.” That is, all of these activities have involved borrowing of funds to some degree that will have to be paid back. There were no guidelines as to how the funds should be used and no accountability or reporting provisions.
Second, one could argue that accountability provisions were not necessary, as business leaders would do the right thing. AIG shortly after receiving its bailout spent $440,000 on a spa vacation for its top performers and last month offered $450 million in compensation-bonuses to 400 employees in its financial products unit (about $1.3 million per employee). Merrill Lynch (which received $10 billion in bailout money) paid $4 billion in bonuses in December and the CEO spent in excess of $1 million to redo his office. Major financial institutions have refused to address how they have used the bailout funds or how much they have left of those funds. This is our money and we are owed an accounting for it.
Third, it is widely believed that the bailout bill of 2008 limited executive pay and golden parachutes. It did not. The actual law states: “If Treasury buys at least $300 million in assets, then the organization must pay tax on salaries of the top five executives that make more than $500,000.” Note all the firm has to do is pay taxes on the excess over $500,000 for only the top five execs in order to obtain $300 million. In addition, “upon purchase of such assets no new golden parachutes can be initiated.” That is, at anytime prior to the purchase such parachutes can be put in place.
Fourth, the bailout bill of 2008 was focused on stimulating the economy. It should be recalled that $150 billion of pork was added to this bill. Funds were provided for film and television productions, wooden arrows for use by children, Virgin Island and Puerto Rican Rum ($192 million) and $128 million for auto racing tracks.
Fifth, we have, at the very least, learned from these mistakes. Congress is considering the “American Recovery and Reinvestment Act of 2009.” Although the draft of this bill states that the first purpose is to preserve and create jobs and promote economic recovery, it is littered with funding for purposes that while clearly worthy, are of questionable impact on our economy. There are serious questions that remain about accountability and reporting in this new proposal.
We cannot afford another bailout like that in 2008, and we should expect better this time around from our federal leaders. Future legislation should have absolute, transparent accountability and be free of additional spending proposals that have little or no impact on our economy.
John F. Mahon is dean of the College of Business, Public Policy and Health at the University of Maine.