Wall Street Compensation, Our Near Meltdown 9-27-8

Wall Street Compensation, Our Near Meltdown
Who Speaks for America?


Every one is running around in a
dither wondering what is happening to our financial house, or is it house of
cards? Of course, the simple answer is greed, and how does Wall Street satiate
that greed? One of the easiest ways to make an incredible amount of money and
keep it is to become the Chairman of the Board of a Fortune 500 company. But
that alone doesn’t guarantee platinum parachutes at the end of one’s corporate
tenure. You don’t even have to be successful. Just look at the records of recent
beneficiaries of corporate send-offs, Ms. Carly Fiorina, who after almost
destroying Hewlett –Packard was sent off to be an economic advisor to John
McCain with a bank-roll in the scores of millions. She of course, for a short
moment, was being considered for vice-president on his ticket. Unfortunately
after not being chosen, the scorned woman decided to tell the truth, and in an
interview she stated that Sarah Palin could not be a CEO of a major Fortune 500
firm. When she realized her faux pas, she quickly amended her remarks to
include John McCain. Of course since “there is many a truth said in jest,” her
honesty really did hurt, and she has been declared persona non grata by the
Steve Schmitt/John McCain campaign machine.

But to be more current, yesterday
Washington Mutual, a bank holding company, whose stock had traded as high as
$45 per share collapsed. The stock had dropped in mid-September to as low as
$2.00 and the price finally settled at 16 cents this week. The Chairman Kerry
Killinger stepped down in June, but remained as the Chief Operating Officer.
This month he was forced to resign because of pressure from the investors and
Alan H. Fishman, a former CEO of the Sovereign Bank was named to head Washington
Mutual on September 8, 2008. The depositors were not happy with what
was going on and a massive run on their banks ensued as customers withdrew
almost $17 billion in less than two weeks. Secret negations were started after
the Office of Thrift Supervision seized the bank and placed into the hands of
the FDIC. The negotiations over this past weekend proceeded and JP Morgan Chase
became the new owner. The new CEO Alan Fishman, who was flying to Seattle when the transfer
was consummated, was now out of job. He had held that position for 17 days, and
for his time and effort he received a $7.5 million up front payment and a cash
good-bye present for $11.6 million. As George Gershwin once said long ago,
“Nice work if you can get it!”

So where does that money come from? Well for sure a good
chunk of it comes from the boards of trustees at many of these firms who want
to first ingratiate themselves with the company’s new “top dog” and later on,
if he/she fails wish to rid themselves of these characters as painlessly as
possible. Usually as a requirement to these “golden parachutes,” a written
non-disclosure, and non-compete statement is a must. Quite often though, many
of these “top-bananas” eventually select their own “cronies” as members of the
board. These “grateful” trustees feel obliged to therefore shower excess
compensation as a heartfelt expression of “thanks.” On the other hand, stock
options being executed at the right market timing bring countless millions to
the “golden parachute” beneficiary. Of course what better way to execute
valuable options than to inflate the stock with non-existent assets of
worthless paper on the books?  Please
note that when an initial public offering (IPO) hits the market, the inside
folk, the CEOs, and other officers, have already been allocated millions of
shares, while quite often, their employees were left out.

I recall vividly when John Hancock went “public” and the CEO
David D’Alessandro was allocated millions of shares. Were the Hancock employees
offered any stock? No! Were the Hancock employees offered any of the IPOs? No!
Of course, D’Alessandro did an excellent job for Hancock, but he increased his
own salary, making himself one of the highest-paid executives in financial
services. His compensation of more than $21 million in 2003 placed him 79th on Forbes's
list of best-paid CEOs and increased debate at John Hancock over discrepancies
between CEO compensation and shareholder returns. What else is new?

There are many, many stories out there on Wall Street and
four years ago I wrote some of this piece about executive compensation. Often
it has nothing to do with whether the company makes money, but most assuredly
it is connected to whether the stock goes up. Ironically the public and the
shareholders find out after the fact that the stock was run up on false
assertions, pumped up figures, and cooked books. Also over the years,
executives have tried to liquidate their massive holdings in an effort to cash
in before the public is completely aware impending revelations. Most
shareholders would be startled to see the company’s executives selling their
own stock. In truth, the average stock investor has his/her holdings mostly in
mutual funds, and has no idea when one of the companies, which make up that
fund, has experienced an executive’s excessive sale of stock. Just look at what
we are witnessing today with companies like Bear-Stearns that reached a high
water market price of $172 per share. We all should wonder how many executives
were bailing out as the stock began to slide in the year before its final
collapse. Unfortunately in a great many of these situations, many of the
employee 401K pension funds were overloaded with company stock, not unlike
Enron and other recent collapses. These company pension accounts disappeared
along with the demise of the parent corporation.

In the summer of 1969, I was a junior analyst with Bache
& Co., which offices were located at 40 Wall Street. Right after I was
employed, I was assigned to work with Ms. Mary DeSapio, whose sector, among
others was transportation, which included railroads and railroad cars. My
responsibility was to write evaluations of companies like St. Louis Car (closed
in 1973) and its parent company General Steel Industries. This was the dullest,
slowest and one of the worst sectors to cover on Wall Street. Ms. DeSapio had a
young intern who tracked her stocks. I had heard through the office “grape
vine” that she had made her reputation by discovering the emerging stock, the
Indonesian company Natomas Oil. In those days Natomas was selling at more than
100+ times its earnings and when I had arrived the stock was in the mid 150’s.
In talking to her young intern I found out that Ms. DeSapio still had a huge
position. Coincidently, I read a story in US
News and World Report
that the top Natomas executives were liquidating huge
amounts of stock. Being a good scout, I went to Ms DeSapio, a single wren-like
woman in her forties, and mentioned the story I had read. She seemed startled
that I brought up that stock. Maybe she was not happy that I had learned of her
connection to that speculative company. When her initial surprise calmed down,
she informed me that executive-selling didn’t indicate anything, and curtly cut
off our conversation. Despite her dismissing of my information, knowledge is
still king, and in that pre-Internet era, I believed that I had found something
interesting that may have had potential value. Ms. DeSapio in her arrogant and
condescending manner attempted to demean the value of that news and seemed
offended that I would bring up her pet project. Within a few weeks the Natomas
stock “tanked” dramatically, and if she didn’t sell her position, she was
really burned. It wasn’t long after that meeting that she was fired. Eventually,
in 1970, Wall Street experienced a huge recessionary problem of unusable leases
to cope with the pre-computer backlog of “paper” that was generated in 1968 and
1969. Thousands were fired, including yours truly. Bache was eventually
acquired by Prudential Insurance in 1981 and the 101-year old Bache name
disappeared until it was brought back and re-branded in 2007.

In the Wall Street Journal's Executive Pay Listing of
April 12, 2004, all the Fortune 500’s top executives had their sources of
income published. How ironic and fitting that this report should come
out on the anniversary of FDR's death, who understood quite intimately how
poorly financial institutions monitor themselves, the need for transparency, and
how greed drives our plutocratic “economic royalists.”  

Salary and Bonus- some selections: Freeport-McMoRan-CEO-
$5,540,000 in 2003 with $10M in stock options and $50M more in potential
options, Merrill-Lynch-CEO- $28M in 2003 with $37M more in unrealized stock
options, Time-Warner-CEO, $9.5M and $11.6M in stock options with
another $18.9M in unrealized options.  Also the front page of the NY Times' Business Day section, bonuses
top $41.4 million at troubled Interpublic for its executives. With Federal
taxes at 35% for anyone over $300,000 per year they should cry? This
compensation is way out of control. Where did they get all of their stock? They
didn't buy it!

Some critics of pay ratios, say formulas that exclude
options are useless. “Usually it's a charade,” says Mr. Alan Johnson
of Johnson & Associates, managing director of pay consultants in NY.
He says, “…employees see through it. They know the CEOs are making
millions on stock, so limiting them on salary means nothing. It is a PR
gimmick.” (The Wall Street Journal). It
is a known fact that in and around 1970, CEO's of Fortune 500 companies made in
real dollars a ratio of 43 to 1 over the average salary of their employees. In
real dollars, wages, taking in account inflation over the past 34 years or
so, have gone up slightly. In other words, the $17,000 of 1970 is not
worth much more than the $35-40,000 of today. Of course times
have changed, and our economy has shifted greatly over the last 30 or so years.
Our manufacturing has shifted to overseas, and we are much more of a service
economy today. No question “freer” trade has brought more
total prosperity to America.
But where is that prosperity concentrated and what will be the affects. In that
light, executive compensation is now 1000 to one! In “real” and tangible 1970
dollars, the average Fortune 500 CEO was making $731,000. By the year 2000 that
same corporate CEO’s compensation went to between $35 and $40 million. While
his worker’s income doubled in 30 years, their real income barely kept pace
with inflation. But the corporate executive had his income go up 52 times.
Inflationary worries were obviously not a factor. Besides all that good news,
the top income tax bracket was reduced by Ronald Reagan and his buddies at

So we have seen what has happened. The GOP/Right has
encouraged the lowering of taxes, the conglomeration of industry, the exporting
of jobs overseas, the deregulation of industry, and the accumulation of greater
money in fewer hands. Now, as in 1929, less people own more of America! In the
midst of this incredible increase in executive compensation, Ronald Reagan’s
administration lowered the highest tax brackets by more than 60% from 71% to
28% in 1986, while raising the bottom tax rate from 11 to 15%. In reality the
Reagan Administration created two tax brackets. The poorest earners paid up to
15% and multi-millionaires paid a little more than double? Did this increase
revenue to the Treasury? No! No wonder we experienced record deficits. Did it
increase wealth to the wealthiest? Yes! Recent articles have debunked the
“urban myth” promulgated by the flat-taxer’s and other anti-tax groups that tax
cuts increase revenues. In fact, tax cuts without expense reductions create
greater deficits. With that in mind, the Reagan years offered some of the
biggest deficits, (tripling the National Debt), continued high unemployment,
averaging over 7% in his tenure, and great private sector increases in wealth.

On the March 17, 2006, broadcast
of the PBS' The NewsHour with Jim Lehrer, New York Times
columnist David Brooks falsely claimed that “in the Reagan years,
unemployment went from 13 percent to 5 percent.”

In fact, according to data
from the U.S. Department of Labor Bureau of Labor Statistics, in 1981, Ronald
Reagan's first year in office, the U.S. average unemployment rate
stood at 7.6 percent. During Reagan's presidency, it reached a high of 9.7
percent, and had declined to a level of 5.5 percent when Reagan left office.
The rate from when Reagan entered office through his last year declined by 2.1
points, far less than the eight-point drop for which Brooks credited Reagan.
(Besides that obvious reality in November of 1981, ten months into the Reagan
Administration, unemployment had risen to 8.5% and continued to rise to almost
10% through February of 1983.)

From the March 17 broadcast of The News Hour
with Jim Lehrer

BROOKS: I disagree a little. I think most people
who call themselves independent are really partisan. They're just lying.

And — and I think partisanship — one of the
things political science shows is that partisan shapes the reality you choose
to see.

People choose the reality that — that flatters
their partisanship. For example, in the Reagan years, unemployment went from 13
percent to 5 percent. If you asked Democrats, at the end of that, did
unemployment go up or down under Reagan, 60 percent said it went up.
Republicans said down.

You choose the reality you want to see. And, then,
the Clinton
years, when you had the reverse, this time, it was the Republicans' turn to be
more pessimistic and wrong. People choose the reality that flatters themselves.

 c/o Media Matter for America http://mediamatters.org/items/200603210007

Along with Reagan’s tax cuts for the rich, we experienced
the Stock Market crash of 1987, the Savings & Loan debacle and bailout for
almost one trillion dollars, and the deregulation of broadcasting, which has
led to the consolidation of ownership regarding thousands of previously
independent stations.

What we have seen in this country has been an explosion in
private wealth and a crying need for public revenues. This drought in public
revenues has resulted in an aging infrastructure, which includes; poor and
deteriorating bridges and roads, an antiquated electric grid system, weak,
porous and inadequate levee systems, un-dredged harbors and rivers, a
deteriorating reservoir system and over-crowded dangerous airports. In the
Clinton Years, taxes on the wealthiest bracket went up to 39.6%, three extra
brackets were created, there were tax cuts for the middle class, surpluses
ensued, and over 20 million jobs were created. A benefit of that expansion of
the work force, especially in the center cities, resulted in a dramatic
lowering of crime in the period from 1993 through 2000. (Another urban myth was
that Rudy Giuliani’s police tactics alone lowered crime in NYC. What is
conveniently forgotten was that crime dropped dramatically in urban centers
throughout America
without Giuliani’s help!)

Of course, one immediate result is that the
“entitlements;” Social Security and Medicare are under attack.
Certainly they are threatened by the demographics facing us. We have a large
“baby-boom” population (64-74 millions) that is aging. This
population emerged from parents that had 2.6 children per family. It
is now being replaced by a generation that is composed of 2.1
children per family. Generally speaking this smaller population is not as
wealthy and earns less in the service sector than its parents, the
baby-boomers, earned in the manufacturing sector! Is the answer less taxes
for this wealthiest of classes? It was said that to tax these people at
previous levels would only bring in 4% more! Well 4%, if that is correct, will bring
in $40 billion at least. Also, why is $75 billion being used from the
Social Security Trust Fund to be used to help balance the budget and defray
more deficits? These same antagonists of Social Security say it is “broke” and
therefore people like John McCain and his leader, President Bush, have called
for its partial or complete privatization. This would be another trillion
dollar gift to our Wall Street “friends.” Conveniently they have forgotten that
the Social Security system runs surpluses and that since Nixon’s time over $2
trillion has been borrowed from this Fund to pay for trinkets like Star Wars space
missile defense systems, the 600 ship navy,  and an all-volunteer army. I am sure that
figure of $40 billion is probably incredibly low. I have also
noticed that a recent report has stated that the IRS has been lax regarding the
issue of corporate taxation. In fact, US Corporations are not paying their fair
share, and many have been running to offshore tax shelters for years,
while they drape themselves in patriotism! The case of Stanley Tool recently
comes to mind! So with corporate taxes at all-time lows (post WWII) and the
capital gains tax at 15%, and the highest marginal rate at 35%, one can readily
see why we have a $500+ billion deficit that is growing. Should we continue
down this path until we are broke?

By the way the myth
regarding unemployment: Courtesy the United States Bureau of Statistics

Since 1928
there have been 13 presidents, 7 Republicans (Hoover, Eisenhower, Nixon, Ford, Reagan, Bush
Sr, and Bush Jr) and 6 Democrats (FDR, Truman, JFK, Johnson, Carter and

Six of the
seven Republican Presidents had unemployment
increase while in office.  Ronald Reagan is the only
Republican President since 1928 to leave office with a lower unemployment rate.

All six
Democratic Presidents had unemployment
decrease or stay the same while in office.  The worst
Democratic performance was Jimmy Carter, who had the same unemployment rate
when he left office as when he entered.

Viewing the
President's 4 year term gives an even more pronounced effect.

Of the
Repubilican President's 9 terms, unemployment has
increased in 7 of the 9 terms.

Of the
Democratic President's 10 terms, the unemployment rate
never increased.

Here is the
same list, sorted by decrease in the unemployment rate.

Unemployment Rate, U.S. Department of Labor: Bureau of Labor Statistics

 period         start end  chng   President
Jan 1993 Jan 1997    7.3   5.3  
-2.0   Clinton I

Jan 1985 Jan 1989    7.3   5.4  -1.9   Reagan II
Jan 1961 Jan 1965    6.6   4.9  
-1.7   JFK/Johnson

Jan 1965 Jan 1969    4.9   3.4  
-1.5   Johnson  

Jan 1949 Jan 1953    4.3   2.9  
-1.4   Truman  

Jan 1997 Jan 2001    5.3   4.2  
-1.1   Clinton II

Jan 1981 Jan 1985    7.5   7.3  -0.2   Reagan I  
Jan 1977 Jan 1981    7.5   7.5  
0.0   Carter  

Jan 2005 Aug 2008    5.2   6.1  +0.9   Bush, GW II
Jan 2001 Jan 2005    4.2   5.2  +1.0   Bush, GW I
Jan 1953 Jan 1957    2.9   4.2  +1.3   Eisenhower I
Jan 1969 Jan 1973    3.4   4.9  +1.5   Nixon  
Jan 1989 Jan 1993    5.4   7.3  +1.9   Bush, GHW
Jan 1957 Jan 1961    4.2   6.6  +2.4   Eisenhower II
Jan 1973 Jan 1977    4.9   7.5  +2.6   Nixon/Ford

One cannot begrudge Ronald
's personal admirers their moment of eulogy. And particularly not in
view of the man's wise embrace of Mikhail Gorbachev late in his term, his
gallant departure into Alzheimer's 10 years ago, and Nancy Reagan's noble
advocacy since then of government support for stem-cell research. There were
moments beyond politics when those of us who opposed Reagan the most could, and
did, tip our hats to him.

But let's talk economics. It is not too early to
contradict those who would elevate Reagan above Franklin Roosevelt, John F.
Kennedy and Lyndon Johnson, or even Bill Clinton, on this score. Yes, Reagan
did change the course of history. But his economic legacy was mainly
destructive, and especially so for the world's poor and our own working class.

Among postwar administrations, who had the best record on
economic growth? The answer is Kennedy-Johnson (49 percent over eight years),
followed by Clinton
(34 percent), followed by Reagan (32 percent). Among postwar two-term
presidencies, Reagan beats out only Eisenhower (21 percent) and Nixon-Ford (24
percent). Call him the best of the Republicans, if you want.

The unemployment rate stood at 6.6 percent when Kennedy
took office and at 3.4 percent when Johnson left it. The average over their
eight years was 4.8 percent. When Clinton
came in, unemployment was at 7.4 percent; it averaged 5.2 percent during his
two terms and fell to 3.9 percent by the end. And for Reagan? Unemployment
stood at 7.5 percent at his inauguration, and it averaged that same 7.5 percent
during his entire eight years. The jobless rate was 5.4 percent when Reagan
left office.

Inflation did come down — from just over 10 percent in
the oil crisis year of 1980 to just over 3 percent in 1983. But at whose
expense? Here the correct contrast is with FDR, who controlled inflation while
doubling output over four years in World War II. In the process, Roosevelt leveled the pay distribution and created the
modern American middle class.

Reagan's disinflation came from unemployment over 10
percent, from his attack on unions, and from high interest rates, which drove
up the dollar and cheapened imports. Those measures bankrupted much of the
manufacturing belt. They damaged the middle class. And they created a vast
trade imbalance and a rising external debt whose consequences haunt us still.
Precisely what Roosevelt built, in other
words, Reagan did much to destroy.

Mythmaking especially surrounds Reagan's economic ideas,
where memory blurs reality into romance. In truth Reagan's economic team was a
shotgun marriage between ideologues, monetarists and supply-siders who couldn't
stand one another. There was even a good-humored (though conservative)
Keynesian mixed in — Murray Weidenbaum, the first chairman of Reagan's Council
of Economic Advisors.

I remember Murray sidling over to me at a meeting of a
deplorable group called the Gold Commission — an official assembly of nut
cases, to be blunt about it — in the Cash Room of Donald Regan's Treasury
Department, on the day in 1982 when the CEA's first “Economic Report of
the President” for Reagan's presidency was published.

Economist- The son of renowned economist John Kenneth Galbraith and of Catherine
(Kitty) Atwater Galbraith, he earned his BA
from Harvard in 1974 and Ph.D from Yale
in 1981, both in economics. From 1974 to 1975, Galbraith studied at King's College, Cambridge.

In conclusion, whether one is a Democrat, Republican or an
independent, or liberal or conservative, the one reality which should be most
apparent to all is that we are way too much in debt. Our personal, corporate
and government borrowing is out of control. Our personal savings rate is
non-existent. Our economic society has been driven by debt, and the “greater
fool” theory which postulates that there is always a greater fool out there who
will pay a premium for what we own. We are running huge budgetary deficits, we
are fighting wars that we are not paying for, and we owe over $11 trillion to
ourselves and foreign countries. We are buying cheap imported goods from
Wal-Mart, who once prided itself on only “selling American!”  They have becomes the world’s greatest
retailer and they are a conduit for our dollars to go straight to China. We are
purchasing $700 billion on foreign oil, and much of it is going to regimes that
do not like us and some of that money is going to finance militants and terrorists
that are threatening our very existence. What we need is honest and strong
leadership. And we need that leadership now! Our society will not long exist
with an attitude of business as usual, and that we are the best because we are
Americans. As Lincoln stated in his famous
speech in Springfield, Illinois in June of 1858, “A House Divided
Against Itself Cannot Stand!” He was talking about slavery, and today we have
to be talking about economic slavery. It is the issue of the great economic and
social divide that has arisen in our country and has the potential of ripping
us apart.

I often quote FDR who said the following, “The test of our
progress is not whether we add more to the abundance of those who have much; it
is whether we provide enough for those who have too little.”  FDR, the Second Inaugural Speech, January 20,


“The immortal Dante tells us that divine justice weighs the
sins of the cold blooded and the sins of the warmhearted in different scales.
Better the occasional faults of a government that lives in the spirit of
charity than the constant omissions of a government frozen in the idea of its
own indifference.” FDR, from remarks he made in 1936.


In the spirit of those remarks we have to pull together for
the commonweal and address the fissures that are renting our nation state
apart. This means sacrifice and cooperation. Let us hope it begins in January.




















































































































































































































































































































































































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