Begrudging Wealth – Part Two

"This is America . We don't disparage wealth. We don't begrudge anybody for achieving success… But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers." Barack Obama. We’ll get to the AIG bonus outrage later.

In February, the President announced the strings that government funding would carry – compensation caps (which I summarized in the original version of this blog). Wall Street and the financial sector screamed like stuck pigs that they would no longer be able to retain the best and the brightest if their compensation and bonus structures were limited to such arcane notions of “profitability” and “accountability.” Treasury outlined the specifics serious caps on going forward beneficiaries of TARP or other government bailout funds, and at least one financial institution, Goldman Sachs, was thinking about returning the bailout cash they had received to rid themselves of the compensation restrictions. Some of the bigger banks are in such horrible shape that they cannot afford to take this step.

A few days ago, AIG – America ’s insurance company (because bailout funds have given the federal government 80% ownership of this monstrosity!) – provided American taxpayers with two examples of why the bailout plan is so suspect by many of us: 1. They revealed who was receiving billions of dollars of taxpayer money against insurance claims (a who’s who list of bad boy financial institutions who “insured” their debt deals with the infamous “credit default swaps” now held by AIG) and 2. AIG publicly stated its intention to pay out $178 million (a bit lower now under pressure) in bonus compensation to its key employees.

The March 17^th Los Angeles Times: “AIG did reduce some of its bonus payments last week under pressure from Treasury Secretary Timothy F. Geithner but said it was legally obligated to pay $165 million to the financial products employees, or else they not only could seek punitive damages but might quit. That could cause even higher losses, the insurer said, because these are the only employees with the knowledge to ‘unwind’ AIG's complex financial deals.” Americans are sensing that “blackmail” feeling again. Who cares if AIG employees quit? They were some of the architects of the company’s downfall. How “best and bright” can they really be?!

It’s pretty clear that the very credibility of the government’s overall rescue/bailout efforts are at stake, which is why, on March 17^th, the majority AIG shareholder, the United States of America operating under instructions from its Chief Executive Officer, President Obama, issued orders to the Treasury Secretary to stop the release of those AIG bonuses immediately. That order was a follow-up to an earlier plan that included bailout cash outside of the newly passed American Recovery and Reinvestment Act – the final version of the recent $787 billion bailout.

But even the February American Recovery and Reinvestment Act itself made the pain a bit worse for the “best and brightest” who were so “bright” that they created intolerable borrowings against clearly overvalued assets from profoundly under-qualified borrowers that literally sank the entire U.S. economy… generating unjustified fee income to these bright folks for screwing their country! So what?!

You might remember a last minute add to the above Act, from Senator Chris Dodd, which did “prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP… The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.” New York Times, February 14^th. The huge problem with this “limitation” is that in many financial institutions (as you can see from the AIG announcement), especially with “big deal” traders and advisors, seven and eight figure incomes are literally spread to hundreds if not thousands of employees – not just the most senior management that gets the compensation caps. It has been this way for many years.

Will any of the above the restrictions or Presidential stop orders work? Maybe for the tops dogs, but there are skeptics. Deprive folks of their bonuses?! Why would they keep working?! Some banks are talking about returning the bailout cash. Fine with me, but those excesses are enraging a deepening sector of voters and threatening the government plans to their core. And some of the underlying mythology justifying such financial excess must die forever.

You might appreciate this summary of some university research studies that appeared in the February 25^th RSS feed from Duitch Consulting Group (www.duitchconsulting.com): Certainly the $23 billion Wall Street bonuses last year raise serious questions about the pay-for-performance model, and recent Duke Univ. research found that “people offered medium bonuses performed no better, or worse, than those offered low bonuses – while the group offered the biggest bonus did worse than the other two groups across all tasks… Similar studies at M.I.T. and Univ. of Chicago concluded the same results: higher bonuses mean lower performance. Research suggests that, by and large, rewards succeed at securing one thing only: temporary compliance.”

Okay, try this perspective from the February 5^th Los Angeles Times: “‘Over the past 15 years there have been a number of efforts to put some sort of restriction on executive pay, both through legislation and through shareholder activism, and yet we see CEO pay continuing to rise,’ said Sarah Anderson, an executive-pay expert at the Institute for Policy Studies in Washington. ‘Wall Street has the best, shrewdest lawyers in the world looking to maintain these outrageous pay levels.’ " If there are tricks and loopholes, these guys will find them fast – they found stock options in the 1990s when President Clinton tried to cap salaries, and this is just one more “create jobs for lawyers” act.

Or how about this one? In a February 4^th article subtitled “how to live on $500G’s in Sodom,” theDeal.com observed that the best and the brightest in the salary-capped companies are likely targets for headhunters: “How many calls will be pouring into Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co. and Goldman, Sachs & Co. inquiring of rainmaking investment banker A or equity chief B or prop trader C -- none of whom had anything to do with mortgages -- whether they might discuss relocating to an institution that won't get public money? And it's not just an individual choice. Every banker accustomed to (or anticipating) a tad more than 500Gs per annum will not only be pondering his situation, but wondering about every colleague in the place and whether they'll jump, leaving him behind like the loser at the high school dance. Don't stand near the revolving doors. There could be a run.”

I’m praying for a run. Really! I hope they run really, really far away!

I’m Peter Dekom, and I approve this message.