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July 21, 2008 |
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Doctors. Lawyers. Architects. A decent society certainly needs them all. But what about bankers? Is banking also a necessary profession? Or is banking merely a grubby game where the few enrich themselves at the expense of the many? These days, the answer seems fairly obvious. We’ve simply seen too much enriching at our expense — bank mergers that have transformed local banks into faceless fronts for faraway corporate empires, escalating “fees” that bleed our checking and savings accounts, subprime mortgage shell games that devastate entire neighborhoods. But banking, not too long ago, actually amounted to more than this sort of enriching. What happened? We trace the story in this week's Too Much. |
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Las Vegas has gained two new distinctions this month that illustrate neatly just how staggeringly polarized income and wealth in the United States have become. A new survey on personal debt — as measured by foreclosures, bankruptcies, and credit card balances — has dubbed Las Vegas America’s most debt-ridden metro area. The city's foreclosure rate, the nation’s third-highest, helped seal the title. Meanwhile, Las Vegas now also boasts America’s most exclusive luxury car dealership. This just-opened Lamborghini Las Vegas at the Palazzo carries a full-range of fine motorcars, including a Bugatti that can hit 250 miles per hour — and sells for almost $2 million. The dealership features a two-level showroom, $400,000 of artwork, a boutique, expresso bar, and a lavish Italian restaurant. The ownership welcomes gawkers, the Las Vegas Review-Journal reports, provided they buy a $10 tour ticket . . . Selfridges, the posh British retailer that services the “pointlessly wealthy,” has just released its 2008 Christmas gift collection. Among the highlights: a $30,000 cashmere dressing gown and an $86,000 “limited-edition teddy bear with emerald eyes and a solid gold snout.” A store spokesperson told the Daily Mail last week that the collection also has “lots of stuff at more modest prices, but there is some gorgeous top-end stuff — and it will sell.”
And now an only-in-Liechtenstein story: Last week, a bank computer technician from this European principality enthralled a U.S. Senate hearing with videotaped testimony that explained, step by shady step, how wealthy Americans go about stashing millions in secret Liechtenstein bank accounts. The witness, Heinrich Kieber, is currently hiding out from Liechtenstein officials, who want him arrested for violating bank secrecy laws. Also testifying last week: a top executive from UBS, the Swiss bank that has been steering wealthy Americans Liechtenstein way. UBS officially apologized and vowed to “stop offering offshore banking services” via branches not “subject to U.S. regulations.” UBS currently holds 19,000 accounts for wealthy Americans. Overall offshore tax evasion by wealthy Americans, says the Senate Permanent Subcommittee on Investigations, is costing the federal treasury $100 billion a year. |
Quote of the Week “At a time when so many working people are hurting, special tax loopholes for buyout billionaires are immoral and indefensible. Americans are hungry for changes to the economy and the tax system that reward the hard work of regular people — not the wealth of greedy buyout CEOs.”
New Wisdom Amartya Sen, Inequality and institutions, Daily Times (Lahre, Pakistan), July 14, 2008. The Nobel Prize-winning economist argues that economic growth, without a more equitable distribution of wealth, will never end global deprivation. Robert Borosage, Wall Street Socialism. Campaign for America's Future, July 16, 2008. With the Freddie Mac and Fannie Mae bailout, “everything has been nationalized — except the profits and the pay scales of the bank's executives.” Mel Lavine, John McCain Looks Back to Theodore Roosevelt. Castro Valley Forum (Calif.), July 18, 2008. The Teddy Roosevelt that John McCain says he admires believed “there is absolutely nothing to be said for government by a plutocracy, for government by men very powerful in certain lines and gifted with `the money touch.’” Donald Tufts, R.I. should reverse tax cuts for the very rich, Providence Journal, July 20, 2008
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Banking on Bigger: A Tale of Financial Folly America's banks are reeling. One giant Wall Street investment bank, Bear Stearns, has already tanked. Citigroup, America’s largest bank, last week posted a $2.5 billion quarterly loss. Share prices in the banking industry have tumbled down 50, even 60 percent and more. Bank boards of directors, amid this turbulence, are scrambling to find shining knights who’ll rescue them — and they're offering fabulous rewards to give these power-suited knights an incentive to succeed. Earlier this month, for instance, Wachovia, the nation’s fourth-largest bank, brought on a new chief executive, former Goldman Sachs alum Robert Steel, with an pay package that could be worth over $38 million. Citigroup’s new chief exec, Vikram Pandit, joined the banking giant last year after Citigroup shelled out $800 million to buy the hedge fund he had started the year before. That transaction netted Pandit $165 million. Then this past January, a month after elevating Pandit to CEO, Citigroup’s board awarded him a stock incentive package worth another $30 million. To American “expert” eyes, incentives this lush make perfect sense. “That’s nothing,” as University of North Carolina-Charlotte finance prof Tony Plath told a reporter when asked about the $38 million for Wachovia’s new CEO. “You pay him whatever you have to in order to save the bank at this point.” Give new superstars enough incentive to succeed, in other words, and banking’s woes will all work out. This analysis has just one inconvenient flaw: Windfall incentives for bank CEOs created those woes in the first place. Bankers, of course, have always endeavored to make money. But in generations past, long before subprimes, many bankers considered banking more than a money chase. These bankers saw themselves, explained the New Yorker earlier this year, as professionals engaged in a “sacred trust.” Novelist Louis Auchincloss, a most perceptive observer of America’s most privileged, captured this perspective years ago in a book he set in the 1930s. “Banking isn't just money-making,” Auchincloss had one banker telling another. “Banking is starting new businesses and saving old ones. Banking is helping the right-man over a bad time. Banking is keeping the heart of the economy pumping. If you don't feel that way about it, you ought to quit and become a stockbroker.” Auchincloss’s banker hero was fighting a noble but losing battle. The money-makers had overrun banking in the 1920s, a go-go financial era much like our own. Their excesses would eventually help usher in the Great Depression. The New Deal, in response, would ultimately curb the “just money-making” spirit by rigorously regulating how bankers do business — and raising taxes substantially on income in the top tax brackets, a move that tended to dampen incentives to push the regulatory envelope. After all, why take risks to earn extra millions if Uncle Sam was just going to tax those extra millions away? But these New Deal regulations and tax rates started shriveling in the 1980s. Banking’s most ambitious soon had all the motive and opportunity they needed to bust whatever remained of banking’s “sacred trust.” And bust they did. Wachovia offers a prime example of how the busting process unfolded. Today's Wachovia loves to celebrate its down-home North Carolina local roots. These roots do go back just over a century, to the day when H. M. Victor set up banking shop at a roll-top desk in the lobby of Charlotte’s Buford Hotel. By 1958, Victor’s operation had become a thriving statewide enterprise, the First Union National Bank of North Carolina. But Victor’s baby would grow no further for another generation. State and federal regulations prohibited bank operations in one state from buying up banks in another. These regs kept banks relatively local — and rewards for bank execs relatively modest. That all changed in the Reagan years. Ronald Reagan would sign into law tax cuts that sheared the top tax rate on income in America’s highest tax brackets from 70 to 28 percent. Corporate America’s movers and shakers would rush to take advantage, and Congress would oblige — by rewriting the nation’s economic rulebook. Between 1982 and 1994, lawmakers swept away all the federal prohibitions against multi-state banking. Banking executives could now legally assemble national banking empires, and they raced to do so. They had a powerful incentive. Bigger banks meant bigger rewards for the executives who ran them. Bigger banks even meant bigger rewards for the executives who lost their CEO suites as big banks gobbled up banks not as big. One example: In 2004, Wachovia acquired SouthTrust in a takeover deal that guaranteed SouthTrust CEO Wallace Malone Jr. $59 million if he left the newly merged bank in the next five years, plus a $3.8 million annual pension. Malone did leave, early in 2006, with a parting package estimated at $135 million. In all, between 1985 and 2007, wheelers and dealers engineered over 100 mergers and acquisitions to create the Wachovia that exists today. Among the biggest: the $25.5 billion purchase of subprime mortgage lender Golden West Financial in 2006, just before the subprime market started nosediving. The Wachovia CEO who engineered this appalling blunder, G. Kennedy Thompson, lost his job this past June. He “retired” with a $34.5 million exit package after earning over $44.3 million in eight years as Wachovia’s top exec. Thompson, to be sure, doesn’t owe all these rewards to his prowess at wheeling and dealing. Under his leadership, Wachovia also perfected “ever-more-creative ways to ‘fee’ us to death,” notes MSN Money analyst Liz Pulliam Weston. Wachovia has figured out how to hit customers with bounced-check fees even if they actually have ample cash in their checking accounts. Fees, to be sure, are increasing throughout the banking industry, not at just Wachovia. The average ATM service charge, SmartMoney reported last week, “doubled between 1998 and 2007.” Today's bankers see nothing amiss with all this fee-gouging. Surely somebody, they understand, has to pay for America’s banking meltdown. |
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Keeping the Pension Promise — to CEOs Christian Weller and Jeffrey Wenger, Robbing Tomorrow to Pay for Today: Economically Squeezed Families Are Turning to Their 401(k)s to Make Ends Meet. Center for American Progress, Washington, D.C., July 2008 A train wreck is coming. With retirement just around the bend, millions of middle class American families aren’t building up their personal financial nest-eggs. They’re borrowing from them, taking loans out from their 401(k) accounts that, once paid back, will leave their retirement incomes down 20 percent and more. These families, Christian Weller and Jeffrey Wenger make plain in this crisp new analysis of America’s 401(k) universe, have little choice. Rising prices and stagnant incomes are forcing middle class Americans to “leverage their future retirement security to ease their present financial insecurity.” The basic stats: In 2006, nearly one on five Americans with a 401(k) was borrowing from it. In 2007, the number of Americans with “defined contribution” retirement plan loans jumped 11 percent. “Defined contribution” plans — mostly 401(k)s — today dominate the retirement plan world. Corporations have been dumping traditional “defined benefit” plans for over two decades now. Defined benefit plans obligate companies to pay workers a specific sum in retirement, usually by guaranteeing workers a percentage of their annual pay times years worked. In defined contribution plans, companies guarantee only that they’ll “match” an employee’s 401(k) contribution with an employer contribution. The actual retirement income the worker receives will depend on how well the money in the 401(k), once invested, grows. But that money can’t grow, Weller and Wenger note in their new 401(k) study, when workers have to use it to “cover the cost of an unemployment spell” or pay for a medical crisis. Interestingly, defined benefit plans are still flourishing in one corner of Corporate America, the corner suites of top execs. Last month, compensation researchers at Equilar revealed that the typical CEO at a top 500 U.S. company has accumulated formula-based pension benefits worth $6.1 million. Top execs also pocket plenty more from the executive version of 401(k) plans. Only these executive plans allow CEOs to defer from taxes as much as they want. Most average workers with 401(k)s, by contrast, can defer from taxes only $15,500 a year. This executive deferred pay can certainly add up. This past May 1, Target CEO Robert Ulrich retired with $140.8 million in “deferred benefits.” |
Stat of the Week State lawmakers, facing cascading budget shortfalls, are looking closer at the stuffed pockets of America’s richest. In California, a $15.2 billion budget deficit has a legislative majority about to hike the top tax rate on annual income over $1 million to 12 percent. The current top rate on million-dollar incomes stands at 10.3 percent.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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