After the House vote rejecting the compromise bailout, it was quite clear that the constituents back home were registering their rage with the notion that fat cats on Wall Street would be bailed out with taxpayer money (an estimated $2,333 per capita), yet they would largely be able to go back to their businesses as though nothing had happened. In a previous article, I had proposed that venture capital clawbacks be used to fund the bailout. This mechanism would address directly the fairness issue that seems to be at the heart of the rage of the constituents and taxpayers. It is very similar to the “polluter pays” principle that is used under the Superfund law to pay for cleanup of hazardous waste disaster sites.

 Bailout requires $700+ billion fund from US treasury to fund purchase of troubled assets and to stave off foreclosures:

Overview

• Fund to be replenished through “clawbacks” from executives of companies receiving clawbacks, (as well as recovery mechanisms already in legislation, equity, increased value of purchased assets) similar to Superfund “polluter pays” principle
• Clawbacks based on strict liability without regard to fault, joint and several liability for each company’s bailout cost
• Scope of clawbacks to be executive compensation, bonuses, stock options and golden parachutes valued at greater than $2 million annually between 2001 and 2008.

Rationale

As I wrote earlier in Use Clawbacks to fund Bailouts since the early seventies, the billionaire plutocrats have captured essentially all of the gains in productivity and GDP that the economy has created, converting these gains into their personal wealth, resulting in the greatest economic inequality since the Gilded Age. As I stated in that article, “The individuals occupying the top one percent of our economy earned 21.8 percent of the nation’s income (2005) and, according to The Nation, hold $16.8 trillion in wealth, $2 trillion more than the lower 90 percent of Americans combined, a good portion of which accumulated during the freewheeling years of the Bush administration.” I refer to these plutocrats as the One Percenters.

The sense of unfairness of bailing out the One Percenters with taxpayer funds drives the rage that is being expressed by constituents in opposition to the bailout. Adopting a principle similar to the “polluter pays” principle in environmental law into the bailout may make the bailout more acceptable to Main Street and less damaging to the long-term federal balance sheet.

To reiterate my earlier points, there is a mechanism –- the clawback -- which allows Main Street to be “refunded” a portion of their investments.

During the bursting of the dot.com bubble, the investors in a Venture Capital company, had the right, and did in fact exercise the right, to clawback, i.e., be refunded from general partners, including requiring the general partners to forego their management fees for the current year and even give back previous years’ annual bonuses if necessary, to meet the clawback obligations.

As I explained in Use Clawbacks to fund Bailouts, the One Percenters have been taking their shares of the profits for years through hedge fund management fees, exorbitant executive compensation, self-dealing stock-option plans, huge year-end bonuses and other ingenious ways of wealth extraction.

Clawbacks should be used now to fund the Great Wall Street Bailout of 2008. The bailout should be funded by clawbacks from the winnings of the One Percenters in the casino games they have rigged in recent years on the conveniently unregulated Wall Street. They should be made to disgorge the losses of the injured parties out of their own pockets just like VC general partners.

In particular the executives of any firm receiving Great Wall Street Bailout proceeds from the government should be subject to clawback of executive incomes, management fees or stock options for the prior seven years, to the extent necessary to fund that company’s bailout. A more generalized form of clawback would be to tax retroactively the types of firms receiving bailouts or the types of financial activities engendering bailouts in amounts sufficient to fund the bailout program. More general than that would be a retroactive clawback tax on One Percenters as a whole in amounts sufficient to fund the bailout program.

It should be noted that clawbacks are not especially intended to assess culpability or punishment or retaliation. They are simply a means of recouping lost investments, a cost recovery mechanism.

The US has used the principle of “polluters pay” enacted in the Superfund statute to fund environmental cleanup costs at hazardous waste disaster sites. In enacting the Superfund law Congress had to determine whether to make the polluters or the taxpayers pay for cleanup of the disasters. Because the polluters had done business with the disaster sites and thereby had derived economic benefit from their involvement with the site, Congress determined that it was fairer for the polluters to pay for the cleanups than for the taxpayers. Every party known to have done business with the polluted site was deemed liable, without regard to fault, to pay for the cleanup. Under the Superfund law, the polluters are held jointly and severally liable to pay for cleanup of the sites they are associated with.

The circumstances of the Bailout are directly analogous to the Superfund: the companies have been rendered financial disaster sites; the One Percenters derived trillions in economic benefit from collectively creating the financial disaster sites at the companies that now require bailing out: Congress must determine whether the taxpayers or the One Percenters should pay the cost of bailing out the companies; because the One Percenters derived huge economic benefit from their involvement with the companies over the past seven years, the One Percenters should pay the cost of the bailouts through clawbacks.

Although the term clawbacks sounds vicious and punitive, imposition of clawbacks is not an assessment of guilt.. Instead, as I explained in my earlier sidebar, they would be merely the cost recovery mechanisms to pay for bailout of the financial disaster sites (the companies being bailed out) We are being told that the next president will have no money left over after the bailout to fund any other programs, like health care, education, alternative energy development, or rebuilding the nation’s infrastructure.

The bottom line principle underlining imposition of clawbacks is that middle class taxpayers should not be made to pay a single dime of the cost of these bailouts. And, the clawbacks should be sufficient to assure that the deficit is not increased one penny by the bailouts so that the urgently needed repairs to our nation’s physical and social infrastructure can be made by the next president.

Comment on or discuss this opinion editorial.

 About the author

E. Michael Thomas is an attorney practicing in Framingham, Massachusetts who has worked with dot.com and venture capital firms. He also practices environmental law where the “polluters pay” principle is used to cleanup environmental disasters. Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it   and Website: www.emtesq.com

Photo Credits: photos of the U.S. Treasury Building in Washington D.C.,  © 2008 TH