End bailout backlash with peace accord

Let’s begin a new compact between Wall Street and Washington that is attuned to the temper of our times and meets the basic standards of equity demanded by the American people, who make great sacrifice but expect that sacrifice to be shared.

Last December I wrote a column titled “Bailout backlash.” Since then, the gathering storm has darkened, public outrage has escalated and our debates on the matter have degenerated.

The stampede on the floor of the House last week, which led to one of the most understandable but ill-considered bills in modern financial history, proves the pitfalls of our current course.

A compact between Wall Street and Washington would create rules of doing business that are fair to taxpayers and rational for investors.

A new compact between Wall Street and Main Street would end Gilded Age compensation practices that have run amok, while maintaining, and in fact promoting, the accumulation of great wealth for those who succeed in creating great wealth shared by the nation as a whole.

A new compact between Washington and Middle America would have government defend the rights of taxpayers, take responsibility for mistakes and end the state of perpetual campaigning that again engulfs Washington only two months after the president’s inauguration.

In the short term, we must fix the compensation and bonus problems. And we must take a serious, sober and creative look at the equities, injustices, incentives and results of the tax code as a whole.

Wall Street is shell-shocked by the anger and rage throughout the nation toward certain ways of doing business. It is a golden moment for a new era of self-regulation, beginning today, while debates proceed about policy.

What is striking is the convergence of opinion from many leading conservatives and liberals about the need to restore rational rules of risk and reward. The field is fertile for creative and innovative policymaking by government, new initiatives of self-regulation by business and a new compact between Wall Street and Washington to end the bailout backlash that grips the nation.

For example: Wealth accumulated by compensation and bonuses can be tied to long-term performance, using equity incentives instead of cash, rewarding results.

The American people are fair, and full of common sense. It is wrong — indeed, it is viewed correctly as sinister — for huge bonuses to be paid in 2005, 2006 and 2007 for paper profits that turned out to be false. It is wrong for those who received them to clutch, with near-desperation, onto bonuses in 2008 and 2009 from businesses whose past failures are subsidized through taxpayer largesse.

This Roaring ’20s, Gilded Age ethic of compensation must be ended, or the bailout backlash will escalate into all-out war between beleaguered taxpayers and unjustly enriched speculators.

However, the American people’s fairness also provides great room for great wealth that is earned by great achievement, when risks that serve the nation are rewarded by wealth that is earned by results.

1. Future bonuses can be structured, and past controversial bonuses can be converted, into a new paradigm that offers high-volume, low-taxed stock options based on long-term performance.

We can adopt huge performance incentives to provide vast amounts of stock options for employees of firms that succeed over a two-to-three-year horizon.

These large grants of stock options can be approved today, at exercise prices tied to current depressed stock prices. They would vest immediately but could not be exercised for two years. They could be taxed at a lowered capital gains tax rate, giving highly favorable treatment for insider stock sales, but only with longer-term success.

For financial firms, this would dramatically reward success and powerfully encourage lending to good customers. It would promote jobs and growth and perfectly align the interests of taxpayers, investors, management, workers and consumers.

Conversely, bonuses for failure would end. Marginal tax rates for the most wealthy could modestly rise after two quarters of growth; capital gains taxes could be increased for short-term speculators. Financial company policy and government policy would promote and reward risk-taking that serves the national interest, while no longer promoting or rewarding failure or reckless speculation.

2. Lower capital gains taxes and/or greater tax credits or advanced research rebates could be offered to venture capital investors and entrepreneurial companies in sectors that will create the next jobs wave and advance strategic national interests.

The price of oil is already climbing back, and with any recovery will skyrocket again. Let’s get ahead of this. Lower capital gains, greater incentives for research and super-accelerated depreciation should benefit firms promoting fuel-efficient cars, new energy and advanced healthcare technologies.

Wealth accumulated through these investments should be encouraged, applauded and rewarded, especially in sectors that are now shortchanged through unwillingness of lenders to lend, or capital drains that will result from any toxic asset program.

We will not end the bailout backlash through anger, witch-hunts or scapegoating, be it deserved or not.

We will end the bailout backlash through simple fairness, common sense and smart policies that promote good business, reward sound risk and encourage great wealth through success that benefits the nation as a whole.

Budowsky was an aide to former Sen. Lloyd Bentsen and Bill Alexander, then chief deputy majority whip of the House. He holds an LL.M. degree in international financial law from the London School of Economics. He can be read on The Hill’s Pundits Blog and reached at brentbbi@webtv.net.