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State-market discipline


It’s Not the Bonus Money. It’s the Principle.

Published January 30, 2009

Published: January 30, 2009

And on the ninth day, the president jawboned.

How else to describe what President Obama did on Thursday, his ninth day in office? Angered by news that Wall Street was doling out $18.4 billion in bonuses for 2008 — “the sixth-largest haul on record,” according to a front-page article in The New York Times, despite billions upon billions in losses — the president called reporters in and looked sternly into the cameras. Then he unloaded on Wall Street executives, just as President John F. Kennedy once unloaded on the country’s steel barons.

“That is the height of irresponsibility,” Mr. Obama said sharply, referring to the bonuses. “It is shameful.” Wall Street, he said, was coming to the government for badly needed help — which taxpayers were providing because otherwise “the entire system could come down on top of our heads” — and the government had a right to expect in return that Wall Street would “show some restraint and show some discipline and show some sense of responsibility.” After going on in this vein for a while, he slapped around Citigroup for agreeing to take that new $50 million corporate jet after agreeing to a huge bailout in November. The government’s demand that the plane be canceled should have been unnecessary “because they should know better,” he scolded.

Mr. Obama didn’t take a shot at John Thain, the former chief executive of Merrill Lynch, who was pushed out last week by his new boss, Ken Lewis, at Bank of America, after Merrill reported a $15.3 billion loss in the fourth quarter. But then, he didn’t have to. The revelation that Mr. Thain had spent $1.2 million remodeling his office shortly after joining Merrill in 2007 — and more recently allotted big bonuses to Merrill’s troops even as the firm’s red ink was forcing Bank of America to seek more government help — has transformed Mr. Thain into the new Richard Fuld. He’s the person Americans would most like to punch in the nose.

This week, American companies announced somewhere around 65,000 layoffs. Caterpillar, Kodak, Home Depot, I.B.M., even mighty Microsoft: they are all cutting jobs. Everywhere in the United States, people are feeling the pain of this deepening recession. Even those with jobs worry about their futures. Their 401(k) plans have been decimated. They are frightened and angry.

Which is why Wall Street should not be surprised that oversize bonuses and $50 million jets generate outrage — and tough rejoinders from the president. “It suggests the selfishness of people on Wall Street,” said Charles Elson, a corporate governance expert at the University of Delaware, who sounded pretty outraged himself. “Wall Street has yet to learn the lesson of what happened.” What happened, put simply, is that the people who thought of themselves as the smartest guys in the room — and were paid accordingly — weren’t so smart after all. They brought down the financial system. They lost so much money that only the government can save them. The scolding they got from the president this week suggests that they’re going to be paying a price — richly deserved, I might add — for a good long time.

When you get right down to it, the purchase of a new plane or an office renovation is pretty meaningless for companies as large as Citigroup or Bank of America. It’s not unheard of for executives to spend $1 million or more on remodeling when they get the corner office. It’s pocket change. And companies can usually make a halfway decent business case to justify a new airplane. (It goes longer distances than older planes, can take more executives to meetings, allows the top brass to be more efficient and productive, etc., etc.) The question of whether bailout money was used to pay for these perks — as alleged by The New York Post, which broke the Citi airplane story — is, at best, ambiguous. Indeed, breaking the airplane contract and sending the jet back to the manufacturer will probably cost the bank more than keeping the plane.

None of that matters. You could make the same argument about the auto executives who flew on corporate jets when they came to Washington to ask Congress for help: surely, it was a better use of their time to fly rather than drive from Detroit, as they did the second time around, after being spanked for taking the jets. That didn’t matter either. What matters is the symbolism. At a time when the country is in such trouble — and executives are asking for bailouts — anything that smacks of plutocracy is going to arouse justifiable populist anger.

“This has been building for 20 years,” said Richard C. Ferlauto, director of corporate governance for the American Federation of State, County and Municipal Employees. “Regular working people haven’t gotten ahead in the economy. They understand that tremendous wealth has been created, and they say, ‘Where’s mine?’ ” He continued: “These guys seem to be living in another universe. So the symbolism of the umbrella stand and the private jet is powerful.” The umbrella stand, of course, was a reference to the $15,000 umbrella stand that the former Tyco chief executive Dennis Kozlowski bought with company funds — and that is part of the reason he is now behind bars.

But there is something else as well. Most people still don’t fully understand what, exactly, Wall Street did that caused so much trouble for the country and the financial system. I spoke this week to David M. Smick, author of a scathing book about Wall Street, “The World Is Curved: Hidden Dangers to the Global Economy.” In indignant tones, he talked to me about the sophisticated off-balance-sheet vehicles the banks used to hide risk and game the system, and the “mortgage-backed securities they were shoving out the door.” He concluded, “I find their behavior just appalling.”

But words like “off-balance-sheet vehicles” and “mortgage-backed securities” don’t have much meaning for most of us. What we understand is greed — which, ultimately, is what Mr. Smick was talking about as well. For most Americans, big bonuses and corporate jets and office remodelings become a kind of stand-in for the real sins of the bankers. They signify what people hate about Wall Street.

The truth is, this is probably the last year for a good long while that Wall Street bonuses are going to be so out of line with reality. Partly that is because the government simply isn’t going to let it happen again, at least not at any institution that has taken bailout money. The top executives at those institutions already have some restrictions on their pay, and there are other, further restrictions in the works at the Treasury Department and in Congress. One proposed new wrinkle would call for bank executives to get most of their bonuses in stock — which they wouldn’t be able to unload until the government was no longer a shareholder in the bank.

Bonuses will also go down because, after this year’s bonus fiasco, Wall Street finally understands that the public scrutiny is going to be fierce. At many firms, 50 percent or more of revenue goes out the door in the form of compensation. That’s simply untenable now.

Finally, the business model of the investment banks is almost certainly going to change. Over the last 20 years, investment banking went from being primarily an advisory business to being mostly a business where firms traded for their own accounts — so-called proprietary trading. It is the trading business that made the banks so immensely profitable. It is also what propelled the creation of mortgage-backed securities and credit-default swaps and all the rest of it. Those vehicles generated both enormous fees and enormous profits.

But that game is over. “It will be impossible to rebuild that business model, which relied so heavily on leverage,” said William Hambrecht, founder and chief executive of the investment firm WR Hambrecht & Company. “I don’t think the government is going to let them take that kind of leverage again.” And the government will also tightly regulate complex securities. “So we are faced with an era of sharply reduced profit opportunities, which means a lot less income,” Mr. Hambrecht added. To him, the big bonuses this year signaled that “Wall Street hasn’t been able to admit that yet.”

Wall Street traders are also extremely reluctant to give up the “eat what you kill” mentality that has dominated their profession these past two decades. There is no sense of shared enterprise at most firms, and no belief among the rank and file that they should have to pay a price if the firm is drowning in losses and needs government support. That is why they are so blind to how they appear to the rest of us. They just want theirs. That is the culture they have created.

Indeed, Ira Kay, a top executive consultant with Watson Wyatt, told me that this bonus season has been akin to “war” inside many Wall Street firms. “It is a small group of people who caused the problems,” he said. But other bankers had very good years — and all over New York they are now complaining about their smaller bonuses, completely tone-deaf to how this sounds outside their Wall Street silos. You can make a pretty convincing argument that that culture — and the bonuses that flowed from it — had a lot to do with creating the financial crisis. If Wall Street can’t bring itself to admit as much, the new administration and the Democratic Congress are going to be more than happy to point it out.

It’s not just Wall Street, either. I’ve long thought that the reason executive compensation became such a flashpoint was because it, too, signaled an “I want mine” mentality among chief executives. It was infuriating to see them bring home tens of millions of dollars even as their company’s stock fell and they laid off employees. Next month, proxy season will begin, and we’ll start to see how much not just Wall Street chieftains made in 2008, but also all executives who run public companies.

I asked Mr. Kay what we should expect. Did corporate executives understand the need to show that they were willing to sacrifice in these hard times, just like the rest of us — or will we see them still grasping for every last dime?

“I am a little disappointed with the reaction of some of the executives,” he replied. “The emphasis on pay-for-performance has gone up to an extent, but the executives are definitely not where their boards are, where the shareholders are, where the media is, or where the government is. They are lagging on this.”

I’m guessing that President Obama is going to be jawboning again before too long.

Published: January 31, 2009


Fred R. Conrad/The New York Times

Maureen Dowd

The president’s disgust at Wall Street looters was good. But we need more. We need disgorgement.

Disgorgement is when courts force wrongdoers to repay ill-gotten gains. And I’m ill at the gains gotten by scummy executives acting all Gordon Gekko while they’re getting bailed out by us.

With the equally laconic Tim Geithner beside him, Mr. Obama called it “shameful” and “the height of irresponsibility” for Wall Street bankers to give themselves $18.4 billion worth of bonuses for last year.

They should know better, he coolly chided. But big shots — even Mr. Obama’s — seem impervious to knowing better. (Following fast on Geithner’s tax lacunae, Tom Daschle’s nomination hit a pothole when he had to pay $140,000 in back taxes he owed mostly for three years’ use of a car and a driver provided by a private equity firm.)

At least the old robber barons made great products. When you make money out of money, unmoored from morality and regulators, it must unhinge you. How else to explain corporate welfare queens partridge hunting in England, buying French jets and shopping for Lamborghinis?

Mr. Obama was less bracing than during the campaign, when A.I.G. executives were caught going to posh retreats after taking an $85 billion bailout. He called for them to be fired and to reimburse the federal Treasury. Now that he has the power to act, Mr. Obama spoke, as his spokesman Robert Gibbs put it, “like that disappointed parent that doesn’t embarrass you in the mall, but you feel like you’ve let somebody down.”

That’s not enough, not with the president and Geithner continuing to dole out what may end up being a trillion dollars to these “malefactors of great wealth,” as Teddy Roosevelt put it.

USA Today wrote about “the A.I.G. effect:” executives finding ways to spend more discreetly, choosing lesser-known luxury hotels and $110 pinot noir instead of the $175 variety.

More than a disappointed parent, they need a special prosecutor or three. Spare the rod, spoil the jackal. Anyone who gave bonuses after accepting federal aid should be fired, and that money should be disgorged to the Treasury.

Claire McCaskill popped out a bill to limit the pay of anyone at firms taking federal money to no more than the president makes — $400,000.

“These people are idiots,” she said on the Senate floor. “You can’t use taxpayer money to pay out $18 billion in bonuses. ... Right now they’re on the hook to us. And they owe us something other than a fancy wastebasket and $50 million jet.”

One Obama official said her idea is catchy, but it won’t work “because no one would come to Treasury to participate, and that means our economy would continue to stumble downward.”

Senator Chuck Grassley urged the administration to snatch back the bonuses. “They ought to give ’em back or we should go get ’em,” the Republican told me. “If this were Japan and a corporate executive did what is being done on Wall Street, they’d either go out and commit suicide or go before the board of directors and the country and take a very deep bow and apologize.”

He was shocked to learn that the Office of Management and Budget, insistent on following the Paperwork Reduction Act, was dragging down a special inspector general’s investigation of what banks are doing with taxpayer money. (After complaints, the O.M.B. yielded on Friday.)

“Once in a while, some C.E.O. comes and talks to me and I wonder if they’re laughing under their breath at having to talk to someone who makes 1 percent of what they make,” he said.

Treasury officials and Barney Frank are dubious about recouping bonuses. “Paulson let the cat out of the bag,” Frank said of Henry Paulson, Geithner’s predecessor, “and it can’t be gotten back.”

But aren’t taxpayers shareholders in these corporations now, and can’t shareholders sue or scream “You misspent my money!” like Judy Holliday?

“In ‘The Solid Gold Cadillac,’ ” said Frank, who knows the movie.

“We got some preferred shares,” he mused, “but I don’t think we could sue on that basis.”

Rudy Giuliani resurfaced Friday to defend corporate bonuses, telling CNN that cutting them would mean less spending in restaurants and stores.

Stupid. Even without bonuses, these gazillionaires can still eat out. It’s like Rudy’s trickle-up Make Work Program: Make Leisure.

Some Obama policy makers still buy into the notion that if they’re too strict, these economic royalists, to use F.D.R.’s epithet, might balk at the bailout, preferring perks over the prospect of their banks going belly-up.

The president needs to think like Andrew Cuomo. “ ‘Performance bonus’ for many of the C.E.O.’s is an oxymoron,” he said. “I would tell them, a) you don’t deserve a bonus, b) where are you going to go? and c) if you want to go, go.”

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