The Real Lesson of Excessive Pay at GM, AIG, and Ally

Taxpayers got rolled--again.

That's the conclusion of a scathing new report by a Treasury Department watchdog overseeing the 2008 and 2009 bailouts of General Motors, AIG, Ally Financial, and several other troubled firms. In 2012, the Treasury approved pay of $1 million or more for 68 executives at the three firms, even though they were still operating with taxpayer assistance. Treasury approved pay of $3 million or more for 37 of those executives, and $5 million or more for 16 of them.

[RELATED: AIG Decides Against Suing Taxpayers Over Bailout]

Such lavish compensation violated the Treasury's own guidelines for pay at rescued firms, according to the Special Inspector General for the TARP bailout program, known as SIGTARP. Treasury guidelines call for maximum cash salaries of $500,000, with anything above that awarded as longer-term incentives meant to discourage risk-taking that boosts short-term profits at the expense of stability. Yet Treasury-approved pay packages exceeded those limits for at least 70 percent of executives subject to oversight in 2012. Treasury "is effectively relinquishing some of [its] authority to the companies, which have their own best interests in mind," the report found.

The natural reaction to this is outrage, if there's any left after all the awful revelations that followed the extraordinary bailouts in 2008 and 2009. Yet every mistake involving the bailouts provides important insights about what the government can and can't do well during an economic emergency. With luck, we'll learn enough from these mistakes to do it better next time (and there will be a next time).

The biggest problem with regard to executive pay is that the bailouts left the rescued firms as hybrid operations trying to operate by free-market principles while under strict government supervision. They were neither fish nor fowl. It turned out to be an unworkable situation requiring one model or the other to prevail.

[READ: Why Taxpayers Will Lose Big on the GM Bailout]

Treasury wanted the rescued firms to operate like regular businesses so they could repair themselves and pay back taxpayer funds as quickly as possible. Yet doing this required talented executives paid at the same scale as other big firms, to assure they wouldn't bolt for better-paying jobs, causing more high-level turnover at companies that were already reeling.

We can have a healthy debate about whether corporate America overpays its top people, but for better or worse, typical pay for top officers at Fortune 100 firms often tops $1 million per year. It's also worth pointing out that fixing a complex, sprawling and massively broken company such as GM or AIG is one of the toughest jobs in business. It takes somebody who's seasoned and dogged, even though dozens of armchair critics no doubt feel they could have done a better job. They couldn't have.

Yet the politics of democratic government make it highly problematic to use taxpayer funds to pay anybody a million-dollar salary, especially since the president himself earns just $400,000 per year. No matter how rational the argument might be, it's political dynamite.

In one sense, this hybrid approach worked. AIG has righted itself, while paying back all the TARP money it got plus $23 billion in interest that amounts to a profit for the Treasury. The government will probably lose about $5 billion on the GM bailout, yet it still saved a company that's critical to the domestic auto industry. As for Ally (formerly GMAC), the Treasury is still about $10 billion in the hole, according to the ProPublica Bailout Tracker, but it could recoup that over time.

[RELATED: 3 Lessons From the AIG Bailout]

There has been a big cost to these bailouts, however. For one thing, they severely damaged confidence in the U.S. government and hardened the impression many people have of crony capitalists dominating decision-making in Washington, at the expense of ordinary people. The bailouts also institutionalized failure by rescuing many firms that should have gone belly up and by sparing investors who should have borne the pain of excessive risk-taking. Market discipline has been lost as a result.

If it happened again, there's a strong case that instead of the hybrid model, the government should either nationalize failed firms and treat them as government bureaucracies, or let them fail and focus on containing the damage. There are in fact new policies meant to prevent companies that are "too big to fail" from collapsing. There's also a good chance they won't work as expected. If they don't, the first principle of the next bailout should that a company that can't pay its own executives probably shouldn't exist.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

More From US News & World Report


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Shareholder committees could curb UK bosses' pay bonanza - report
    Shareholder committees could curb UK bosses' pay bonanza - report Reuters - 15 minutes ago

    British public companies should be required to create shareholder committees responsible for proposing executive pay, to help constrain the spiralling salaries of top bosses, said a report published on Thursday. The report, by lawmaker Chris Philp … More »

  • Sunovion Pharma to buy Canada's Cynapsus for $624 million Reuters - 41 minutes ago

    The announced purchase price of $40.50 per share in cash was a 120.5 percent premium over that closing price. Through the deal, Sunovion will acquire Cynapsus’ drug candidate, APL-130277, which is currently in its phase three clinical trial stage. … More »

  • Salesforce third-quarter revenue forecast misses, shares fall
    Salesforce third-quarter revenue forecast misses, shares fall Reuters - 54 minutes ago

    For the third quarter, Salesforce said it expected an adjusted profit of 20-21 cents per share and revenue of $2.11 billion-$2.12 billion. Analysts on average were expecting an adjusted profit of 24 cents per share on revenue of $2.13 billion, … More »

  • EU VP tells British to 'get their act together'
    EU VP tells British to 'get their act together' AFP News - 1 hour 6 minutes ago

    Britain's political leaders should "get their act together" and tell the EU what they want from their divorce, European Commission Vice President Frans Timmermans said in an interview with AFP. Timmermans, the Dutch right-hand man to commission … More »

  • AP NewsBreak: Ritz's office backed app deal without bidding
    AP NewsBreak: Ritz's office backed app deal without bidding Associated Press - 1 hour 25 minutes ago

    Indiana schools Superintendent Glenda Ritz's office approved a lucrative technology contract that state government officials said should have been subject to competitive bid, awarding it to a company that ... … More »

  • Dollar weakens on contrasting economic data AFP - 1 hour 41 minutes ago

    The dollar weakened against the euro and the pound on Wednesday as dueling data on both sides of the Atlantic offered a mixed picture of economic conditions. Towards 2100 GMT, the euro was at $1.1156, ... … More »

  • Oil Slump Sparks Stock Losses as S&P 500 Wipes Out August Gains Bloomberg - 1 hour 45 minutes ago

    Energy share sled declines as New York-traded crude fell below $45 a barrel on data showing U.S. stockpiles climbed more than analysts had projected last week. The S&P 500 ended the month down 0.1 percent, ending its longest run of gains in two … More »

  • Business Highlights Associated Press - 2 hours 1 minute ago

    ___ Historic commercial flight from US lands in Cuba The first commercial flight between the United States and Cuba in more than a half century landed Wednesday, re-establishing regular air service severed ... … More »

  • France's Orange says in talks with Iran's MCI on potential cooperation
    France's Orange says in talks with Iran's MCI on potential cooperation Reuters - 2 hours 2 minutes ago

    French telecoms operator Orange is in negotiations with Mobile Telecommunication Company of Iran (MCI), the country's largest mobile operator, "regarding a number of areas of potential cooperation and business topics," a spokesman said. The … More »

  • BP OKs Whiting refinery Tier 3 hydrotreater Reuters - 2 hours 6 minutes ago

    BP Plc's (BP.L) 413,500 barrel per day (bpd) Whiting, Indiana refinery has received corporate approval to build a new hydrotreater to meet Tier 3 gasoline standards that will be required by the U.S. Environmental Protection Agency, according to a … More »

  • WeChat Chatter Fuels China Money Exodus Into Hong Kong Policies Bloomberg - 2 hours 26 minutes ago

    Forget about restrictions imposed by mainland regulators trying to halt the exodus of billions of yuan out of China and into Hong Kong policy purchases. For Hong Kong part-time agent Wen, who declined to give her first name, it’s been that easy to … More »

  • Italy and Germany signal tougher EU stance on migrants
    Italy and Germany signal tougher EU stance on migrants AFP News - 2 hours 26 minutes ago

    Italian Prime Minister Matteo Renzi and German Chancellor Angela Merkel agreed Wednesday to step up efforts to send migrants with no right to asylum in Europe back to their homelands. "All of us in Europe must work for the repatriation of those who … More »

  • Energy drags Wall St lower; S&P down slightly in August
    Energy drags Wall St lower; S&P down slightly in August Reuters - 2 hours 28 minutes ago

    Stocks ended lower on Wall Street on Wednesday, as energy shares tracked oil prices lower, and the S&P posted a loss for August, the first negative month for the benchmark index since February. The Nasdaq gained 1 percent in August and the S&P shed … More »

  • How the Dow Jones industrial average fared on Wednesday Associated Press - 2 hours 31 minutes ago

    U.S. stocks took small losses Wednesday as energy companies fell with the price of oil and chemical and materials companies traded lower. That pulled the market lower for August, ending a five-month winning ... … More »

  • H&R Block and Brown-Forman tumble, Chico's FAS rises Associated Press - 2 hours 32 minutes ago

    Stocks that moved substantially or traded heavily on Wednesday: H&R Block Inc., down $2.54 to $21.66 The tax preparer reported a bigger first-quarter loss and less revenue than analysts expected. Brown-Forman ... … More »

  • US stocks fall, dragged down by sinking oil prices AFP - 2 hours 45 minutes ago

    US stocks fell modestly Wednesday, pulled down by sinking oil prices, closing out a sluggish August which saw the S&P 500 score its first monthly loss since February. At the close the Dow Jones Industrial ... … More »

  • Infoblox reports 4Q loss Associated Press - 2 hours 49 minutes ago

    On a per-share basis, the Santa Clara, California-based company said it had a loss of 18 cents. Earnings, adjusted for one-time gains and costs, came to 8 cents per share. The results exceeded Wall Street ... … More »

  • Cloud management company Box's quarterly revenue jumps 30 percent Reuters - 3 hours ago

    (Reuters) - Cloud management company Box Inc's (BOX.N) quarterly revenue jumped 30.3 percent as the company added customers. Its net loss narrowed to $38.1 million, or 30 cents per share, in the second ... … More »

  • tops Street 2Q forecasts Associated Press - 3 hours ago

    The San Francisco-based company said it had profit of 33 cents per share. Earnings, adjusted for one-time gains and costs, were 24 cents per share. The results beat Wall Street expectations. The average ... … More »

  • Shoe Carnival posts 2Q profit Associated Press - 3 hours ago

    On a per-share basis, the Evansville, Indiana-based company said it had profit of 22 cents. The footwear retailer posted revenue of $231.9 million in the period. Shoe Carnival expects full-year earnings ... … More »

  • Markets Right Now: Stocks edge lower on Wall Street Associated Press - 3 hours ago

    The latest on developments in global financial markets (all times local): 4:00 p.m. Stocks are closing out their first losing month since February as a quiet summer continues on Wall Street. A thin batch ... … More »

  • Ireland says Apple CEO spoke to PM, committed to stay
    Ireland says Apple CEO spoke to PM, committed to stay Reuters - 3 hours ago

    Irish Prime Minister Enda Kenny spoke to Apple (AAPL.O) chief executive Tim Cook ahead of the European Union's announcement of a 13 billion euro (11.04 billion pounds) back tax bill and the U.S. firm committed to remain in Ireland, Kenny's office … More »

  • US stocks slip as lower oil prices sink energy companies
    US stocks slip as lower oil prices sink energy companies Associated Press - 3 hours ago

    U.S. stocks are down slightly in afternoon trading Wednesday as energy companies fall with the price of oil and makers of chemicals and other materials take losses. Stocks are on track for their first ... … More »

  • Feds: Company tied to polygamous group used child labor Associated Press - 3 hours ago

    Federal labor lawyers have filed another child labor case against a Utah-based company tied to a polygamous group alleging underage laborers were put to work for long hours for little pay in dangerous ... … More »

  • Grain lower, livestock mixed Associated Press - 3 hours ago

    Grain futures were lower Wednesday on the Chicago Board of Trade. Wheat for Sept. fell 2.25 cents at $3.61 a bushel; Sept. corn lost 2.50 cents to 3.015 a bushel; Sept. oats was off .75 cent at $1.61 a ... … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change