January 30, 2009

Whitehouse Slams Lavish Executive Compensation

Mr. WHITEHOUSE. Thank you, Mr. President. I have a different topic today. This speech is about a stove, a jet, and $40 billion.

The stove belonged to Margarita Fuentes, and a local deputy sheriff in Florida repossessed it for the finance company. The case went all the way to the Supreme Court, and became the famous case of Fuentes v. Shevin, which every first year law student has to read.

The Court held that you couldn’t take away Ms. Fuentes’ stove, not without giving her a hearing; that she had a constitutional right to a hearing.

The Court stated “the constitutional right to be heard is a basic aspect of the duty of government to follow a fair process of decision-making when it acts to deprive a person of his possessions.”

Important rule: The finance company may well have been right about the stove, but the sheriff still can’t take property without due process.

That’s the stove. Now, the jet.

Citigroup has received billions and billions in Federal funds — $45 billion in preferred stock purchases alone — to prevent Citigroup from failing. What did they do? Buy a $50 million French-made luxury private jet.

It took the new Secretary of the Treasury to personally talk them out of it, with a helpful push from our colleague, Senator Levin. And that’s not all. Here’s how Maureen Dowd reports they spent money on executive office furnishings at Merrill Lynch, just bought by Citigroup:

…big-ticket items included curtains for $28,000, a pair of chairs for $87,000, fabric for a “Roman Shade” for $11,000, Regency chairs for $24,000, six wall sconces for the bargain price of $2,700, a $13,000 chandelier in the private dining room and six dining chairs for $37,000, a “custom coffee table” for $16,000, an antique commode “on legs” for $35,000, and a $1,400 “parchment waste can.”

A lot of executive compensation goes to the same executives who led their companies into this mess, while reaping vast sums.

For example, Wells Fargo received $25 billion in bailout money, is planning layoffs but is keeping its CEO and chairman who were paid $12.5 million and nearly $23 million in 2007, respectively.

JP Morgan received $25 billion in bailout money, but is keeping its CEO who was paid $28 million in 2007.

Capital One bought and closed GreenPoint mortgage — 1,900 layoffs, 1,900 families where someone lost a job – they received about $3.5 billion in bailout money, and they’re keeping their CEO who was paid more than $73 million in 2007.

And this week’s New York Times reports that despite “crippling losses, multimillion dollar bailouts and the passing of some of the most important names in the business,” an estimated $18.4 billion was paid out to Wall Street employees in 2008 – that was the sixth highest total in history – in what was most certainly not Wall Street’s sixth best year in Wall Street’s history.

Firms on the brink of extinction that were saved only by the U.S. taxpayer still saw fit to reward the people who created the mess with over $18 billion for their performance this past year. President Obama rightly called this shameful.

So that jet is symbolic of a Wall Street culture of unrestrained self-indulgence that now, because of the bailouts, begins to happen at public expense and shows no signs of abating.

And now we come to the $40 billion.

According to an analysis by the Wall Street Journal, the executive-deferred compensation obligations of bailed out Wall Street firms amount to more than $40 billion. As shown on this chart: Banks Owe Billions To Executives. Financial giants getting injections of Federal cash owed their executives more than $40 billion for past years’ pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

By the way, this whole executive-deferred compensation scheme is nothing but a big tax dodge to begin with.

Banks participating in the bailout program carried these obligations on their books, and the cash from our bailout is being used to pay them, or will be used to pay them. Mr. President, $40 billion in taxpayer dollars will end up in the pockets of the very executives who tanked those firms.

How much is $40 billion? Here is how it breaks down State by State based on population.

If you are the Governor of California, you can look forward to $4.780 billion as your State’s share of that $40 billion bailout.

If you are, as the wonderful new Presiding Officer is, from Colorado, you can look forward to $636 million as your State’s share of deferred executive compensation for Wall Street.

If you are from Missouri, as the distinguished Senator in the Chamber, you are looking at $768 million as Missouri taxpayers’ share of the $40 billion bailout.

Generally, when a company goes into bankruptcy, the executives who are owed the $40 billion in deferred compensation would have become general unsecured creditors and have to wait in line with other such general unsecured creditors.

Experts report that in most cases this means losing all deferred compensation or recovering pennies on the dollar. Executives at Lehman Brothers, which was allowed to go into bankruptcy, will probably lose out on their deferred compensation.

By contrast, nothing has been done to address the deferred compensation obligations of Citigroup, Goldman Sachs, Bank of America, JP Morgan, and other banks that have been given a lifeline.

As shown on this chart, you will see the estimated debt to executives at Goldman Sachs is actually bigger than the capital injection. It is an astonishing sum of money.

I should throw in my own home State of Rhode Island. We are a small State. Here is our share of it: $140 million. That is our entire budget for our two 4-year State colleges for a year — the entire State budget for them; $140 million out of Rhode Island to pay for $40 billion in tax-dodged, deferred executive compensation.

As people who are on the floor will recall, that is more than the entire program we spent so many hours fighting about for the U.S. auto industry. Remember that? That was sort of $18 billion to $35 billion. This is $40 billion, and nobody is even talking about it. And we fought for days about whether to support our own domestic auto industry.

Well, I think the jet shows that the Wall Street culture of lavish self-indulgence is not likely to change. But something very important has changed, and that is the taxpayers are now starting to pay for it, and they are not going to stand for it for long.

If something is going to change, we in Congress have to change it; we need to do it now, and we need to do it in a way that sticks. That’s where Ms. Fuentes’ stove comes in.

“The constitutional right to be heard is a basic aspect of the duty of government to follow a fair process of decision-making when it acts to deprive a person of his possessions.”

That is the case of Ms. Fuentes’ stove.

If it takes due process before poor Ms. Fuentes can have her stove taken away, then it takes due process before certain adjustments can be made to the obscene and grotesque executive compensation paid for by bailouts.

It takes some due process before anything can be done about this $40 billion in executive-deferred compensation.

Without a due process forum, we have unilaterally disarmed the powers of Government that can make those adjustments. That is a choice we make to unilaterally disarm the powers of Government that could do something about the $40 billion.

I submit if we don’t make some reasonable adjustments, that failure will so damage public credibility and faith in the entire exercise; in addition to being profoundly unfair, in fact, that it will eliminate or diminish our ability to manage the crisis. People will not want to hear any longer from us.

The ordinary due process forum for troubled companies, bankruptcy court, is not the best forum for this, for the very reasons that corporations need resdue: they serve a public utility for us in the economy. But the fact that they provide that vital public utility function is no reason to say these other things cannot also be adjusted. That does not mean they should not have to change their ways.

As I said, the only way to change their ways, it appears, is to make them change. So, I will shortly be filing legislation to create a Temporary Economic Recovery Oversight Court, a forum that could provide due process, short of a full bankruptcy filing, and empower Government to take reasonable steps to restrain the lavish self-indulgences to which these masters of the universe have become accustomed. I am also exploring other ways of addressing this critical issue.

But I encourage colleagues of mine who are interested in this issue to talk to me about how we can make this right. There are technical issues. If anybody is interested, please contact me. I think this is a bipartisan issue. I do not think a Republican is any happier about $40 billion in deferred executive compensation coming out of the public fisc than a Democrat, and if we do not take action, the swelling river of the righteous and proper anger of the American people will rise up, and overswell its banks. I have lived through difficult economic situations in Rhode Island, where public anger overswelled its banks. It is not a good place to be.

The people’s confidence in their Government’s ability to treat them fairly will be justifiably compromised, and we will have lost their confidence, the old-fashioned way: We will have earned it.

The poet William Blake spoke of times when we should not let our sword sleep in our hand. American Government gives us a vital sword, one that can trim away the lavish excesses of the lotus years, and treat all Americans fairly, not create a favored taxpayer-supported Wall Street class that is treated differently than workers in Michigan and elsewhere. I submit we must not let that sword sleep in our hands.