Over 9 million American families lost their homes in the aftermath of the 2008 financial crisis and millions watched their retirement savings evaporate. Meanwhile, the Wall Street banks that caused the crash were doling out executive stock options that would generate huge windfalls once bailout funds had pushed up their stock prices.
Then, thanks to a perverse loophole in the tax code, the banks could write off the entire cost of these options and other bonuses, leaving ordinary taxpayers to make up the difference.
The origin of this loophole is a President Bill Clinton reform in 1993. After campaigning against the abuses of excessive CEO pay, he pushed Congress to cap the deductibility of pay at $1 million. But he included a huge loophole for so-called “performance-based” pay.
So what did companies do? They kept salaries around $1 million and labeled the rest “pay for performance.”
This loophole applies to all companies, but it has been particularly obscene and even dangerous when it comes to the financial industry. In the run-up to the crash, the loophole helped fuel the “take the money and run” CEO pay practices on Wall Street. In the eight years before their firms collapsed, executives at Lehman Brothers and Bear Stearns cashed out a combined $2.4 billion in bonuses and stock, most of it fully deductible “performance based” pay.
After the economic meltdown, Wall Street bailout recipients such as JPMorgan Chase, Bank of America, PNC Financial and SunTrust lost the privilege of deducting lucrative executive pay and bonus plans from their corporate taxes. But these banks rushed to escape from public bailout pay controls, some by borrowing in the private market to pay back Uncle Sam.
As a result, Wall Street banks quickly returned to their profligate ways, doling out massive bonuses to top managers, while deducting the cost and leaving ordinary taxpayers to make up the difference.