Citigroup took on a lot of risk earlier in this decade. As with any high-risk strategy, one potential outcome is temporarily high returns. That’s what happened with Citigroup and a large slate of managers congratulated themselves with salaries ranging from $5-50 million per year (data on 2005 executive compensation; article on current CEO’s $216 million in earnings over the last year).
Now the returns aren’t looking so good. The executives have paid off mortgages on their Park Avenue townhouses and their Nantucket beach houses. What about the average American taxpayer? Under the government’s latest scheme, he or she is going to cough up $20 billion immediately and potentially be stuck with another $306 billion in losses on crummy loans and securities held by Citigroup (nytimes story).
It would be tough to come up with a better example of socializing loss after the management of Citigroup privatized and pocketed gains.
Perhaps it is time for a new approach. Wall Street executives exposed taxpayers to more than one trillion dollars in losses in order to help themselves to salaries in the $20-100 million per year range. It would have been a lot cheaper if we had a policy where the CEO of any sufficiently large investment bank was paid $100 million per year direct from the U.S. Treasury. In return for this guaranteed payout, he or she would forgo any numbers-based compensation from the bank and therefore would have no incentives to take big risks whose consequences would ultimately fall on the taxpayers’ shoulders.