Close the Wall Street CEO Bonus Loophole

Over nine 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 Sterns 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.

According to a new Institute for Policy Studies report I co-authored, the top 20 U.S. banks paid out more than $2 billion in performance bonuses to their top five executives over the past four years. These payouts occurred after these banks were out from under bailout limits on deducting executive compensation. The taxpayer subsidy for these payouts was more than $725 million, or an average annual tax subsidy for the banks of $1.7 million per executive.

Between 2012 and 2015, Wells Fargo faced $10.4 billion in misconduct penalties for deceptive lending and other "bankers gone wild" behavior. During these same years, CEO John Stumpf pocketed $155 million in fully deductible performance pay at a cost to taxpayers of $54 million.

Between 2012 and 2015, American Express CEO Kenneth I. Chenault raked in over $123 million. The taxpayer subsidy for this payout was over $43 million. During the same period, taxpayers subsidized over $22 million for CEO pay at Capital One Financial and $17 million at Goldman Sachs.

Without a public intervention, we're setting ourselves up for the next risk-infused crash, driven in part by short-term pay incentives. The Dodd-Frank financial reform legislation prohibited Wall Street bonuses that encourage reckless behavior. Regulators need to stop dragging their feet on implementing this part of the law.

Eliminating the tax loophole for "performance pay" would also help discourage these risky payouts. A bill introduced in both the U.S. House and Senate, the "Stop Subsidizing Multimillion Dollar Corporate Bonuses Act," would do just that.

This reform would also generate an estimated $5 billion a year in revenue that could pay for urgent needs, such as affordable higher education and repairing vital infrastructure.

Taxpayers should not have to subsidize massive CEO bonuses at any firm. But such subsidies are particularly troubling when they are propping up a pay system that continues to encourage the high-risk, short-termist behavior which caused one devastating national crisis -- and could cause more in the future.