Being an executive at a "too big to fail" company has its perks. After U.S. taxpayers rescued AIG, General Motors and Ally Financial, many of the individuals responsible for botching business plans and bringing those major corporations to the brink of bankruptcy enjoyed fat paychecks and bonuses.
A report issued last week by the Troubled Asset Relief Program's inspector general slammed the Treasury Department for rubber-stamping these generous executive-pay packages. One of the conditions of receiving bailout funds from Uncle Sam was a requirement to keep compensation within a reasonable range -- just enough to ensure key employees stay on board to keep the firms profitable enough to repay the borrowed billions. Treasury instead signed off on pay in excess of $3 million each for 54 percent of the top executives, with 49 individuals swelling their bank account to the tune of $5 million or more.
The gilded paydays were granted without establishing "meaningful criteria for granting exceptions" and without undertaking reforms in the process, despite earlier warnings from the inspector general about the lack of "robust policies, procedures and criteria to ensure that pay for executives ... stays within [Treasury's] guidelines." The report expresses outrage at the "lack of appreciation" and failure to "view themselves through the lenses of companies substantially owned by the Government."
Therein lies the real problem: government ownership of a private company. The very concept is completely at variance with the vision of the Founding Fathers of the appropriate scope and role of a federal government with few and enumerated powers. Uncle Sam is a terrible boss and can't compete with private corporations because when federal bureaucrats are in charge, they rarely face the consequence when they make mistakes.
This problem carries over to private firms that accept bailout money and partial public ownership. Once a safety net is put in place and companies can expect to be bailed out, there's no reason not to roll the dice on extremely risky ventures. Since the price of failure is passed on to taxpayers, recklessness becomes a virtue.
Severing risk from reward is what caused the financial crisis in the first place, not a lack of regulation. GM, AIG and others should have been forced into an orderly bankruptcy that preserved the rights of creditors. Keeping the government out of the equation also means corporations could have chosen whatever executive compensation shareholders thought to be appropriate. That's the way business should be done, but times have changed.
Far from getting rid of "too big to fail," the Dodd-Frank Wall Street regulation bill enshrined it into law. The idea has decreased the independence of corporations and pushed higher risk onto taxpayers. The result is something deeply antithetical to the foundations of a market economy based on free and voluntary exchange. It's time to get government out of the internal affairs of private corporations.
Nita Ghei is a contributing Opinion writer for The Washington Times and Policy Research Editor at the Mercatus Center.