Freddie and Fannie: A Modest Proposal

NEWSWEEK, July 19, 2008

by Robert Reich, secretary of Labor under Bill Clinton, and author of "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life"

Of course Fannie and Freddie are getting bailed out. They're Bear Stearns to the 10th degree — way too big to fail, especially with the rest of the Street in turmoil. And of course taxpayers get stuck with the tab.

What worries me is the complete lack of accountability by Fannie's and Freddie's executives, as well as Wall Street investment bankers also now being insured by taxpayers. We've created the worst form of socialized capitalism — private gains combined with public losses. These executives and bankers are among the best paid in all of corporate America. Their organizations are treated as if they're giant investor-driven private sector entities as long as they're healthy. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out.

Surely there will be more failures or near failures of financial institutions in the coming months, and American taxpayers will once again be called on to insure their solvency. The important question is what conditions should be applied.

Herewith a modest proposal: when taxpayers insure a giant entity against loss — Freddie, Fannie, Wall Street investment banks, whatever — the entities must agree that (1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the president of the United States, and (2) the government gets 5 percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance). If and when the entities become profitable again, taxpayers are thereby compensated for the risk they've taken on.

[Emphasis ours.]