by Gilles d'Aymery
"The faults of the burglar are the qualities of the financier."
—George Bernard Shaw, 1905
(Swans - April 6, 2009) A CLOSER LOOK at the moneyed class: I missed an amusing detail two weeks ago regarding the bonus brouhaha at AIG. It was indeed a brouhaha orchestrated by politically motivated attorneys general (Connecticut and New York), grandstanding politicians, and, above all, the MSM chasing the ever-dwindling ad revenues. And it was a distraction from the real game played by those in the know, power- and finance-wise. What I missed was Richard Holbrooke, the current special envoy to Afghanistan and Pakistan, the former diplomat, investment banker, and whatever other multi-tasking occupations he's engaged in during his prolific and profitable career. It happens that like Edward Liddy, Mr. Holbrooke was a member of AIG's board of directors -- a position he held from 2001 to 2008 when compensations, including bonuses, were regularly approved without second thought, which was only natural. Why would a board member, paid a paltry $600,000+ a year for attending a few meetings, concern himself with the bonuses of people working full time greasing the wheel of fortune of the Masters of the Universe, a universe to which he belongs? It made perfect sense (from their perspective), and still does. It's worth noting that Holbrooke was managing director of Lehman Brothers, the investment bank that went under last September, from 1985 to 1993. (Let me add for the fun of it that Rahm Emanuel, Obama's chief of staff, sat on the board of Freddie Mac for 16 months, a stint that was worth $320,000.) Small world!
NOW, MEMBERS of that class can legitimately feel miffed when they are not only shortchanged but also thrown under the bus. Take Jake DeSantis, an executive vice president of the AIG financial unit that created much of the mayhem, which he joined after the fact in order to clean up the mess. He publicly, through a letter published in The New York Times, resigned, offered a few straight words from the heart in defense of the AIG bonuses (though his mind may have been missing in action in light of the comments posted on the Times Web site). He went on to say he would give his after-tax $700,000 bonus to charities of his own choosing, and he gave the finger to everybody. He may have a point aside from his intellectually sketchy presentation and his seeming ignorance of the pain the rest of us is experiencing. Still, he had a point. Why is the ire directed at the likes of him and not the likes of Holbrooke? His $700,000 bonus was certainly worthier than Holbrooke's $600,000. At the very least, DeSantis worked 24/7 for better or worse. Holbrooke only attended a few meetings a year and cashed in on compensations we cannot even fathom. So, who is worthier of our rage and our "representatives'" indignation?
DO NOT TAKE ME WRONG, I have long fought inequities and abject, obscene compensations -- and the power and undemocratic trends they entail. I have no sympathy for the likes of Jake DeSantis. Actually, if Mr. DeSantis ever reads these Blips, I would recommend that he contact David Saslav, a graduate of MIT as is Mr. DeSantis. Saslav is quite intelligent, as I am sure is DeSantis. Yet, David, also coming from modest origins, chose to take a slower path in life in order to dedicate as much time as possible with his wife Melissa to their common passion, classical music. Ivy leaguers can make socially responsible choices.
STILL, DeSantis and the other AIG recipients of bonuses were the wrong target. The ruckus was a side show, created by Congress and the MSM to divert the attention and angst of the public from the real scandal, over $50 billion paid by AIG to domestic and foreign banks -- the "counterparties" -- between September and December 2008, after the initial bailout of AIG, without having any of these institutions take a "haircut." They were paid at par (in full). For toxic assets worth at best 30 cents to the dollar they received the full dollar! The bonus uproar ($160 million), orchestrated by the Establishment, allowed the loot ($52 billion) to pass under the radar screen.
GO ONE STEP FURTHER: The House, reflecting the outrage of the "American people" that it helped manipulate in the first place, voted to tax those bonuses at a 90 percent rate. The rabble applauded -- but it's a joke and another deflection from real accountability. Here is a story in contrast. On November 13, 2008, the House Committee on Oversight and Government Reform invited five prominent members of the financial world to testify and explain their take on the crisis. They were: John Paulson, George Soros, James Simons, Philip Falcone, and Kenneth Griffin -- five hedge fund managers of great repute. They were treated with kid gloves and much deference, asked questions of import about the financial system, viewed like sages and experts.
WHAT DID THESE FIVE MEN have in common? They had made billions for themselves by betting on the collapse of the housing and banking sectors. In 2007, Mr. Paulson personally made $3.7 billion; George Soros, $2.9 billion; James Simons, $2.8 billion; Philip Falcone, $1.7 billion; and Kenneth Griffin, $1.5 billion. To give you an order of magnitude, taking $1 billion as an example: An average American earning $50,000 a year would need 10 years to gross $500,000 and 20 years to reach $1 million. (okay, this is not exact arithmetic because it does not take into consideration the factor of inflation, but it does provide an idea.) Well, a billion is 1,000 millions. Grab your calculator!
THESE FIVE individuals made a combined $12.6 billion in 2007, an average of $2.52 billion per person. These figures include their own capital gains and the managers' shares of fees (known as "performance fees," which can run as high as 20 percent). How much did Congress allow them to keep? Eighty-five percent. That's right, these people were only taxed 15%. Compare this to Mr. $50,000-a-year journeyman's tax exposure. First, if he is self-employed he paid 15% of his income in Social Security tax (our five bozos were exempted from the SS tax since their revenues are not considered income by the tax code). Then he had to pay federal and state taxes (how much? At least another 15 to 25%?). I'm no tax accountant, but it's not hard to figure out who the suckers are, courtesy of Congress, the "representatives" of the American people!
IF YOU THINK THAT it was just a fluke that these guys made such a killing in 2007, please do your homework. It's been going on for many years. And if you think that as the economy tanked in 2008 these guys came back to earth, let me help you with your homework: In 2008, according to the April issue of Institutional Investor's Alpha magazine, the average pay at hedge funds was $794,000 (down from $940,000 in 2007). Check the list of the "Top 25 Highest-Earning Hedge Fund Managers." Not surprisingly, you'll find James Simons (Renaissance Technologies Corp.), who took home $2.5 billion; John Paulson (Paulson & Co.), $2 billion; John Arnold (Centaurus Energy LP), $1.5 billion, and good old George Soros (Soros Fund Management LLC), with $1.1 billion. The 25th man on the list (they are all men), Andrew Hoine, also from Paulson & Co., only made $75 million. Over all, 15 made more than $160 million, the amount of "retention" bonuses allocated by AIG to some 400 individuals, which Congress voted to tax 90% over $100,000 (the vote was another scam with no chance whatsoever to carry the force of law because it's unconstitutional to target a small group of people, especially retroactively). But Congress did not address the revolting schedule of the tax code. There are talks of bringing the tax rate of the "performance fees" of these gamers up to 35% (or 39.5% if Obama's budget passes) -- still no Social Security tax to be applied to these revenues, while the swan song of Social Security and other entitlements like Medicare and Medicaid is growing louder and louder in the name of fiscal discipline.
AND HOW DID these speculators make their billions? By shorting the market, a technique that is often viewed as a price discovery mechanism and can help uncover accounting fraud, but if it does not cause the underlying problems it certainly exacerbates them. Case in point: Lehman Brothers. Recall that when its CEO Richard Fuld was dragged to Capitol Hill on October 6, 2008, for a tongue-lashing, he testified that his firm had been in part brought down by naked short selling (a more nefarious technique) and the spread of false rumors. His charges were dismissed with a sneer by the fuming lawmakers. It turns out, however, that Fuld was correct, as a March 27 Bloomberg article, "Naked Short Sales Hint Fraud in Bringing Down Lehman," clearly shows. Both Bear Stearns and Lehman were savagely attacked by speculators, particularly naked short sellers. Harvey Pitt, the former SEC chairman, called it a "fraud." Irving Pollack, a former director of enforcement at the SEC in the 1970s, had this to say: "This isn't a trail of breadcrumbs; this audit trail is lit up like an airport runway. You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you've got your manipulators."
THERE IS ANOTHER WAY to look at this. Some people have made hundreds of millions, or billions, of dollars, betting against firms that -- with the exception of Lehman, which went belly-up and triggered the path to the road to hell the entire world is journeying on -- have had to be bailed out by taxpayers. In a circuitous scheme these people have made their ill-gotten gains at the taxpayers' trough. Once more we've been privatizing the profits and socializing the losses -- and again transferring wealth from the bottom to the top. Note, however, that this transfer of wealth is increasingly carried out by not just the lower, poor classes, but by the middle class -- people with incomes up to more or less $250,000 a year. All stats show that real wealth is now concentrated within the top 0.1 to 0.5 percentile of the polity -- gargantuan wealth yielding enormous power; an ever more son-devouring Saturn (check your mythology).
PRESIDENT OBAMA has suggested that our Masters of the Universe and Captains of (whatever-remaining) industries show some "restraint" in regard to compensations -- that they should share the burden of the collective pain. That's a dandy and good advice, but it's another rhetorical piece of bread for the circus. Two examples: Nicholas Chabraja, the CEO of General Dynamics, was paid $17.96 million in 2008, and upon retiring this year will walk away with another $48.5 million. Robert Stevens, the CEO of Lockheed Martin, took home $26.5 million in 2008 (source, Too Much). And do not forget that Wall Street awarded $34 billion for bonuses in 2008 (without much of a peep from Congress). These people have no social conscience.
WANT MORE EXAMPLES? Fannie Mae and Freddie Mac, which had to be taken over by the government, have just announced that they expect to pay $210 million as retention bonuses to 7,600 employees in a period ending early 2010 ($51 million have already been paid out in late 2008). The Hay Group, a management consulting firm, has reviewed the proxy statements of corporations with more than $5 billion in revenue. The analysis of the review is published in The Wall Street Journal (WSJ) in an April 3 article by Joann Lublin, "CEO Pay Sinks Along With Profits." From the title you may conclude that our CEOs feel the pain too, right? Excerpts:
The median salaries and bonuses for the chief executives of 200 big U.S. companies fell 8.5% to $2.24 million. [...]
Including the value of stock, stock options and other long-term incentives, total direct compensation for the CEOs dropped 3.4% to a median of $7.56 million. [...]
While median CEO salaries grew 4.5%, bonuses fell 10.9% as profits decreased by a median 5.8%. [...]
CEO compensation decreased more sharply at banks and brokerages, long the source of some of the biggest paychecks. Median annual cash compensation for CEOs in the financial industry fell 43%, to $976,000. Total direct compensation fell 14.2%, to a median $7.6 million.
TAKE VIKRAM PANDIT, the CEO of Citigroup, which has received lots of TARP money, and who has accepted a salary of $1 in 2009. Well he sure can: In 2008, he received a total direct compensation of $38,221,200 (salary: $958,300; stock option grants: $8,432.900; and restricted stock grants: $28,830,000). If you peruse the entire list, you'll see that the guy who tops it got a total direct compensation of over $100 million. Thinking of it, the $7.5 million median total compensation of this crowd seems to be just about right. This is what Lawrence H. Summers made in 2008. As a managing director of the hedge fund D. E. Shaw he was paid $5.2 million, and he collected an additional $2.7 million in speaking fees, mainly from Wall Street firms including some that have received TARP money. Summers, of course, is a former Treasury secretary in the Clinton administration and former president of Harvard University, who has joined the Obama administration as director of the National Economic Council. In this function he is advising the president and the Treasury secretary on the current financial crisis and on how to regulate (or not) hedge funds and the financial firms that have paid him so handsomely. (Learn more about this ironic turn of events as well as other millionaires in the White House.)
OF LATE, I've taken to reading Bloomberg and the WSJ on a regular basis. The information is evidently skewed in favor of the elites, but the facts are there for all intrigued minds to see. Other sources of information are Option ARMageddon, Zero Hedge, and the Wall Street gossipers at Dealbreaker.
WHAT CAN BE DONE with these Captains and Masters that are lionized daily on CNBC? Some argue that they should all be fired or lined up against the wall (a more extreme action) to make an example. One might feel good about it, but keep in mind that "anger is a poor advisor." Get rid of them and they will be easily replaced. The pool of greedy people is bottomless. I'd surmise that many of you, dear readers, would joyfully feed at the trough if you were in the right place at the right time. Note that I did not write "all of you," but "many of you." One must recognize that greed is pervasive and a powerful motivator. Whichever political or ideological system, it has always been present in one form or the other. Forget the messengers (greedy people); address the message (greed).
PERSONALLY, I've long been an advocate of implementing a maximum wage and abolishing the minimum wage. That the highest paid workers should not be paid more than a defined multiple of the lowest paid workers. In my book, the CEO of a company would be entitled to 5 times the amount paid to the company's lowest paid employee; upper management, 4 times; middle management, 2.5 times, etc. Some think this is too drastic and the multiplier ought to be between 10 and 25. Whatever the multiplier is, decided democratically, it certainly would encourage the employers to pay their employees well, and it would also decrease inequities (income disparity) and augment pie sharing. The weakness of this approach is that it does not broach the entire socioeconomic system. It does not reach independent contractors easily, the rentier class, the people making capital gains, the sons and daughters of wealth inheriting vast sums of money that they do not deserve and never earned.
A SIMPLER APPROACH would be to reform the tax code, or scratch it altogether and create a new one, in which all gains from wherever they come are treated as income, and all deductions abolished, especially mortgage interests and charitable donations -- the latter being the main vehicle used by the moneyed class to avoid estate taxes -- and then apply a truly progressive taxation as existed between 1944 and 1963 with a top marginal rate hovering around 91 percent -- ninety-one percent.
TAKE A MOMENT to look at the "Federal Individual Income Tax Rates History, 1913-2009," compiled by the Washington-based Tax Foundation. You can also download a useful 68-page PDF file (268 kb). Then analyze. Look at the tax structure during the roaring twenties (1925-1931) with its top marginal rate of 25 percent. Look at the evolution, starting in 1932 all the way to 1963. See how the top marginal rate begins its downtrend in 1964 with a 70 percent top marginal rate until 1981; then, under Reagan, 50 percent (1982-1986); then 38.5 percent, even 28 percent during Bush Senior; slight increase to 39.6 percent under Clinton; and down again to 35 percent in 2003 (Bush Junior). Keeping in mind that the so-called growth of the past 30 years was built on plastic (debts), don't you see a correlation between the roaring twenties and the late era of greed? Can you notice that when income disparity was substantially shrunk (1932-1963) the country shared its bounties much more evenly and the famed middle-class came into existence? Go back (or forward) to progressive taxation and this current obscenity will disappear within a few years. The entire polity will be made whole again.
OF COURSE, we have different and more complicated challenges to face, such as climate disruptions, resources depletions, water shortages, soil erosion, poverty galore, etc., but one has to start somewhere. Fixing the tax code is a good place to start. In conclusion, if the pitchforks need to be used, they should not be directed at the DeSantises of this world or the Captains of Industry and the Masters of the Universe. They should be aimed at Congress, a good place to start. And, if you want to cut the umbilical cord between the oligarchs and your "representatives," nick campaign contributions from the Captains and the Masters and get rid of K-Street -- that is, abolish all lobbying. But that's another issue.
IS IT EVER GOING to happen? Here's a small indicator of how rotten the system is: Senator Blanche Lincoln (D. Arkansas, home of the Wal*Mart Walton family) and Senator Jon Kyl (R. Arizona) are offering an amendment to deeply cut estate taxes for the 0.2 percent of the population that pay them. Presently, the estate tax kicks in at the $7 million level and carries a 45 percent rate. The senators want to raise the bar to $10 million and lower the rate to 35 percent, which would keep $250 billion in the hands of the happy few over the next ten years. Way to go, America! Keep swallowing the "socialism" scare while the government you elect nourishes argentocracy!
MEANWHILE, an estimated 633,000 jobs have been lost in March -- a number that will be revised in the next few weeks. We have passed the five million mark (since December 2007) as our oligarchs keep drinking champagne.
. . . . .
C'est la vie...
And so it goes...
La vie, friends, is a cheap commodity, but worth maintaining when one can.the life line won't hurt you much, but it'll make a heck of a difference for Swans.