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October 6, 2008 |
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Is anybody happy with the bailout bill that passed Congress last week? Doesn’t appear so. Even the bill’s most ardent supporters talk about holding their noses while they voted “aye.” And no one, not even any author of the bill, is claiming that the bailout is going to fix what ails us economically. So what’s next? This week, in Too Much, we look at a fascinating new book — by one of America’s most respected progressive economists — that lays out what could and should happen after voters speak this November. This week's issue also peers inside the newly enacted bailout’s fineprint. You may be surprised by what we found. Stay tuned for our continuing Too Much bailout coverage. Later this month we'll be at the House hearing that's slated to take testimony from the five hedge fund managers who last year each took home over $1 billion. We can hardly wait. |
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In hard times, even hoteliers for the high and mighty have to work a little harder. The good folks at Miami’s five-star Mandarin Oriental Hotel, for instance, have added a luxury pet program. Any guest who checks in with a furry friend gets a souvenir golden collar tag. The pet gets a bone-shaped placemat, special treats, and a plush bed complete with “first-class turn-down service.” Owners can also order from a special pet menu that features grilled beef tenderloin and organic chicken breast. One-night stays at the Mandarin can run up to $1,629. A guest with a pet pays another $100 for “deep room cleaning.” Notes a hotel spokesperson: “We aim to provide all our guests with Mandarin Oriental’s legendary service — regardless of whether they arrive on two or four legs!” Some of the world’s most financially favored love to pamper four-leggeds. Others love to turn them into accessories. That’s why Heng Long, the Singapore firm that specializes in turning crocodile and alligator hide into handbags, isn’t fretting about the global economic downturn. Heng Long profits, Reuters reported last week, have jumped 19 percent so far this year, and the company is planning to double its productive capacity. Explains top exec Koh Choon Heong: “The rich always spend money.” Heng Long is currently processing 280,000 skins a year for Prada and other international fashion houses. A Hermes Birkin bag that retails for $45,000 will typically take three hides . . . Rafael Correa, the 45-year-old president of Ecuador, learned his economics at the University of Illinois. Now his country has a thing or two to teach the United States. Just over a week ago, voters in Ecuador overwhelmingly approved the completed work of their nation’s National Constituent Assembly, a special body that had drafted a new constitution and a body of related legislation. Included in that legislation: a “maximum wage” for all agencies and enterprises that get more than 50 percent of their financing from public tax dollars. The new cap limits the pay of top executives in Ecuador’s public-financed sector to 25 times the Ecuadorian minimum wage, currently $200 per month. The cap does have exceptions that allow, in certain situations, a top exec to pull in 40 times the minimum, or $96,000 a year. The pay limit, says Nelson López, a legislative sponsor, aims to help “eliminate the inequities and abysses that divide Ecuadorians.” The new Ecuadorian constitution takes aim at the same goal with provisions that ban large landholdings and redistribute idle farmland . . . The richest family in the United States today? The latest Forbes list of America’s 400 richest has the answer: the Walton clan, the heirs to Wal-Mart founder Sam Walton's personal fortune. Jim, Robson, Alice, and Christy Walton rank fourth, fifth, sixth, and seventh in the new Forbes top 10. They hold a combined $93.1 billion. All four owe their net worths, the Institute for Local Self-Reliance’s Stacy Mitchell noted recently in the Minneapolis Star Tribune, to an economic model that has devastated the U.S. manufacturing sector. Many of the 3 million manufacturing jobs lost since 1990, Mitchell points out, “can be traced to big-box retailers and the relentless pressure they have placed on companies to cut costs by moving to countries with low wages and lax labor laws.” |
Quote of the Week “Much of the anger at the bailout and financial meltdown stems from the basic fact that we live in a world in which 1,000 people at the top control assets worth double those held by the bottom 2.5 billion, a world in which the top 10 percent own 85 percent of everything.”
New Wisdom Center of Concern, Income Inequality. A new Voting the Common Good: Election 2008 factsheet from a faith-based organization that focuses on social injustice. Institute for Policy Studies, A Sensible Plan for Recovery. An approach to the bailout that attacks the root cause, our vast economic divide between top and bottom. Sherry Colb, The Rationality of Spite: Why the Bailouts Do, And Should, Make People Angry. October 1, 2008. A Cornell law prof challenges the conventional wisdom that deems ordinary people “irrational” for opposing a Wall Street bailout that would “rescue” the economy. Andrea Useem, Where Do Evangelicals Stand on CEO Compensation? Christianity Today, October 1, 2008. A look at business leaders who believe that “excessive compensation erodes social trust.” |
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The Bailout and CEOs: Untruth in Advertising The $700-billion Wall Street bailout bill has now become law, after lawmakers backing the bill packed the legislation with billions in sweeteners to rally their skeptical colleagues. But the bailout still does include, we’re all assured, one bitter pill — for Wall Street CEOs. Top Wall Street executives, the bill’s champions are trumpeting, will not be getting rich off bailout dollars. The bailout legislation’s executive pay provisions, says Rep. Barney Frank, amount to the first “restrictions on excessive CEO compensation” in U.S. history. The bailout bill’s official one-page summary delivers the same celebratory message. The title on the summary section on CEO pay: “No Windfalls for Executives.” The bailout’s provisions on executive pay do, to be sure, give some cause for celebration. The legislation carries a ban on “golden parachutes,” for instance, and language that lets the feds “claw back” executive earnings based on phony accounting. And the legislation also includes a provision that places a $500,000 cap on the individual executive pay that bailed-out companies can deduct from their taxes. Any executive pay over that cap — including pay in the form of stock options and other so-called “performance-based incentives” — will now get a tax ax. This represents a precedent-setting advance over existing law. The tax code’s current $1 million deductibility cap on executive pay only applies to straight salary. Companies can deduct everything else, no matter how many millions that everything else ends up totaling. All these executive pay restrictions in the bailout bill, listed neatly, certainly do sound impressive. So what’s the problem? Just this: Nearly every executive pay restriction in the bailout legislation comes with a loophole built-in. Take, for instance, that $500,000 cap on how much executive pay bailed-out companies can deduct off their taxes. This cap only applies when the Treasury Department buys up over $300 million of a company’s “troubled assets” through an auction process. If Treasury Secretary Henry Paulson’s people buy up a company’s troubled assets directly, the $500,000 deductibility cap doesn’t apply. Nor does the “clawback” provision. Even the bailout bill’s celebrated ban on golden parachutes comes with a loophole. The golden parachute ban, in auction bailout situations, only applies to executives hired after the auction takes place. Those executives who led their companies into the bailout zone will be able to ride off, into the sunset, with saddlebags stuffed with windfalls. “The golden parachutes,” as Rep. Peter DeFazio from Oregon noted last week, “have been exchanged for camouflage parachutes.” But that’s not the worst of it. In situations that don’t involve auctions, the bailout legislation directs the Treasury to “require that the financial institution meet appropriate standards for executive compensation.” Who will define “appropriate”? The legislation leaves that up to Secretary Paulson. Not a great idea. Secretary Paulson, as CEO of banking giant Goldman Sachs, amassed a personal stock stash worth over three-quarters of a billion dollars. His conception of what constitutes “appropriate” pay for bailed-out executives just might not gibe with the definition American taxpayers have in mind. The bailout bill’s biggest executive pay loophole of all? The legislation does nothing to restrain, in any way whatsoever, executive pay at the Wall Street companies the Treasury Department will now hire to manage the “troubled assets” the federal government will shortly start buying. Should any of this really bother us? Shouldn’t we be concentrating on cleaning up Wall Street’s mess, not punishing Wall Street’s executives? Cleaning up the mess surely has to be a top priority. But avoiding more mess also needs to rate right up there on the federal priority list, and that’s why we need serious restraints on the pay of bailed-out executives — not to “punish” executives, but to prevent the reckless executive behaviors that have brought us face-to-face with so much economic peril. The bottom line: The longer we as a society let top executives chase after dazzling rewards, the more recklessness we encourage. The bailout legislation, as now passed, does establish the principle that we need “limits on compensation” to discourage CEOs from taking “unnecessary and excessive risks that threaten the value” of bailed-out companies Congress now needs to spell out specifically what these limits should be. Lawmakers didn’t get executive pay right on their first go-around with the bailout. In January, fortunately, they’ll have another chance. |
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Some Real Audacity of Hope Robert Kuttner, Obama's Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Chelsea Green Publishing, 2008. 213 pp. The United States has reached, with the Wall Street meltdown, what the Economic Policy Institute’s Larry Mishel last week called “a transformational moment.” The ideological foundations of the Reagan Era have now all crumbled. But no national leader has yet built up a consensus for an alternate base.
The Democratic Party’s Presidential candidate, back in 1932, mouthed backward-looking platitudes about balancing the budget and cutting federal spending. He won election anyway. That candidate, Franklin D. Roosevelt, would then go on to transform America. Like Lincoln before him, FDR pulled off an achievement that seemed politically impossible to his contemporaries. Lincoln freed the slaves. FDR made government, for the first time ever, a helpful partner in the everyday economic life of ordinary Americans. A President Barack Obama, economist and author Robert Kuttner believes, could be equally transformational. A President Obama, Kuttner noted in a Washington appearance last week, would have little choice. “Obama is going to have to be FDR,” as the progressive analyst puts it, “or he is doomed to failure like Herbert Hoover.” Kuttner has written a remarkable new book that explains just why. He completed the writing for this just-published Obama’s Challenge in August, before the last three weeks of Wall Street unraveling. But that early deadline didn’t matter. Kuttner saw the crisis coming — and he sees the solution, too. “Only one general policy approach,” Obama’s Challenge contends, “can dig the economy out of its current hole and put it back on a path toward broadly shared prosperity: Restore taxes on corporations and the wealthiest Americans, reduce spending on foreign wars, incur temporary larger deficits, and use the proceeds for very substantial social investments.” How substantial? Kuttner outlines a $700 billion a year program of new domestic outlays — for building a post-petroleum economy, for restoring America’s public infrastructure, for making every human services job caring for young children and old adults a well-paying professional job. Candidate Barack Obama has proposed nothing remotely near as sweeping. Neither, back in 1932, did candidate Franklin Roosevelt. The two share something else in common: incredibly turbulent economic times. “If a President Obama does embrace a more radical economic recovery program,” writes Kuttner, “the reason will be that economic conditions leave him few other good choices.” But even if Obama were to embrace an ambitious recovery agenda, could he gain support for it? Obama’s Challenge walks us through the society-shaking transformations that other Presidents have wrought, not just Lincoln and FDR, but LBJ as well, “the president who delivered the century-delayed promise of full civil rights.” In each case, popular movements pushed a sitting President in a far more progressive direction. In each case, history demonstrated that “an eloquent and principled President has immense power to define the moment and transform the nation.” And that would be Obama’s challenge, “to reverse the thirty-year trend not just of Republican rule but of voter quiescence and Democratic complicity,” to raise expectations “and then rise to meet them.” This slim, inspiring, and sometimes even thrilling new book will have you believing that we can indeed end our nation’s “broader pattern of increasing insecurity and inequality.” Quite a feat in our still cynical times. Read it. And hope Barack Obama reads it, too. |
Stat of the Week In 2007, the top five executives at Wall Street's top five investment banks — only two of which, Goldman Sachs and Morgan Stanley, now survive as independent entities — took home a combined $613 million in personal compensation. .
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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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Wall Street financial firms, New York’s state comptroller 
In a sense, we’ve come back to the future, back to 1932, the last time a deeply unequal United States confronted a deeply frightening economic crisis while the White House and Congress flailed about aimlessly.