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September 15, 2008 |
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Last week’s revelations that the just-fired top executives at Fannie Mae and Freddie Mac may walk off into the CEO sunset with getaway packages worth a combined $24 million — after leading the two mortgage loan giants to billions in losses — had commentators clucking up a quick consensus. We Americans, huffed pundits and politicos alike, simply must not tolerate windfalls for CEOs who perform poorly! Ignore these guys. They have the problem all wrong. They’re going crazy about outrageous rewards for poorly performing CEOs. They’re missing the real driver behind the Fannie Mae and Freddie Mac meltdown: the notion that outrageously high rewards, in a modern economy, play a perfectly legitimate role. We have more on incentives and injustice in this week's Too Much. |
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The cushiest perch in Corporate America may well be a seat on a corporate board of directors. The typical director at a major U.S. company last year pulled in $236,147, says a new report from Mercer consulting. Not bad for attending a few meetings a year and reading stacks of memos. Many CEOs serve as directors on the boards of their buddies, but don’t expect to see Colorado business leaders Dave Anderson and Mike Callicrate on a Fortune 500 board any time soon. The two last week blew their shot at corporate cushy by writing an op-ed for the Colorado Springs Independent that blasted executives who “pay their workers so little that their millions of American workers will never enjoy a middle-class lifestyle.” Added the op-ed: “Since 2000, incomes of the top 1 percent of Americans have grown at a rate of 11 percent a year, while incomes of the bottom 99 percent have basically remained flat.” The piece's title: “Time for another Tea Party.” Things went pretty well for the world's hedge fund managers last year. The top 50, the trade journal Alpha notes, averaged $588 million. But hedge fund earnings this year are lagging, and hedge fund managers, a top pension consulting firm charges, are gouging their investor clients to maintain the incomes to which they have become accustomed. Fund managers, objects the Watson Wyatt consulting firm, are effectively raising the management fee they charge clients — typically 2 percent of the cash clients give hedge funds to invest — to as much as 7 percent by expecting clients to foot the bill for basic hedge fund operating expenses. Hedge funds chiefs are billing clients for transatlantic trips they take to make marketing presentations, their internal “team-building” days, and even their office stationery . . . Among all the nations in the developed world, few can boast gaps between rich and poor as tiny as Finland's. In the United States, income-earners in the top 10 percent average 4.9 times the bottom 10 percent. In Finland, just 2.3 times. Only 5 percent of Finns live in poverty. The U.S. rate: 17 percent. And where you start in Finland doesn't determine where you'll end up. In the United States, your parents' income explains 48 percent of your eventual income. In Finland, a real land of opportunity, just 20 percent. So what's worrying Finns these days? The prospect of losing their inequality. Three-fifths of Finns, says a new TNS Gallup poll released last month, feel their nation has become too unequal . . . Back in America’s original Gilded Age a century ago, notes historian M. H. Dunlop, wealthy New Yorkers weary of “seeing only persons like themselves who owned the same things they owned” went on midnight “slumming tours” to sneak peeks at “the unimaginably poor.” Some guidebooks even carried listings for these slumming excursions. Other wealthy New Yorkers took their cheap thrills in less formal outings. Some would drop by toy stores to watch poor kids gaze longingly through the windows at “toys they would never have a chance to touch.” Today’s bored wealthy don't have to sink to such stunts. They can do their sneak peeking from a decent distance. Case in point: The 16-page photo spread that appeared in the India edition of the August Vogue, the luxury magazine that serves, notes analyst Jeff Yang, as “a bellwether of a country's ability to mint concentrated wealth.” The Vogue India spread featured unnamed poor Indians — a toothless barefoot man, for instance, and an old woman missing her upper front teeth — carrying designer fashion accessories that ranged from a $10,000 Hermès Birkin bag to a $100 Fendi baby bib. Half of India's people live on less than $1.25 a day. |
Quote of the Week “In 2004 the World Health Organization published a study of mental illness in a selection of countries that demonstrated the U.S. having not only the most mental illness but also the most serious forms. What produces mental health in a nation? Studies demonstrate that the amount of mental illness in a rich nation is associated with the income gap, the difference in earnings between the rich and the rest of us.”
New Wisdom Polly Toynbee, The right conspires to hide it, but this is no classless society, Guardian, September 9, 2008. In an unequal society, the “illusion that anyone can make it is created by fixating on a few who do,” notes this insightful analysis, “as if a room full of lottery winners were typical of lottery players.” Robert Weissman, Executive Pay and the 'Market Economy,' Multinational Monitor, September 11, 2008. A rebuttal against those who seek to “justify astronomical executive pay.” Peter Wilby, The myth of the super-rich, New Statesman (UK), September 11, 2008. Explains why today's tycoons deserve to be considered not wealth creators, but wealth drainers Rick Wartzman, Put a Cap on CEO Pay, Business Week, September 12, 2008. Cogently explains why Peter Drucker, the founder of modern management science, believed that top corporate executives should receive no more than 25 times the average salary in their companies. |
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Fannie, Freddie, and Failure Mega million-dollar rewards, Americans have been assured over recent decades, give top corporate executives an incentive to “perform” well. In fact, outrageously high rewards do nothing of the sort. Outrageous rewards, in everyday corporate life, serve only to give top executives an incentive to behave outrageously. The jackpots that CEOs can win have become so huge that executives will do most anything to win them. They will even, as the Fannie Mae and Freddie Mac stories so shamefully demonstrate, recklessly endanger the American dream. Back in the mid 20th century, ironically, no outfits nurtured that dream any more admirably than Fannie and Freddie. These two “government-sponsored enterprises,” by buying up the mortgage loans banks made to lower-income Americans, brought capital and quality-control to the mortgage market. Thanks to Fannie and Freddie, millions of American families gained homes of their own. So what went wrong? How did two sober enterprises that actually helped working families evolve into reckless wheeler-dealers that have left millions of average households deep in debt and foreclosure? The answer is floating in the compensation sea-change that has, over recent years, flooded and swamped America’s corporate executive suites. A generation ago, in the decades right after World War II, top execs had no trouble staying sober, mainly because they had no reason to go off the wagon, no incentive to behave recklessly. If they operated responsibly, they could make decent money, maybe 30 to 40 times what their workers were making. These top executives, to be sure, could have tried to cut corners. But what would have been the point? In the middle of the 20th century, high tax rates on high incomes discouraged any reckless CEO moves to get rich quick. In the 1950s and into the 1960s, income over $400,000 faced a 91 percent federal tax rate. In the 1970s, the top-bracket tax rate never dipped below 70 percent. This would change, under Ronald Reagan. One by one, the checks and balances of the U.S. economy that had kept an informal lid on how much top execs could expect to make all eroded way. The top tax rate slid down to 28 percent. And two other key brakes on executive misbehavior — a strong union presence at the bargaining table and consumer-friendly federal and state rules and regulations — withered as well. In this new environment, CEOs suddenly had plenty of incentive to start playing fast and loose. By taking risks to fatten quarterly bottom lines and wow Wall Street, top executives could now make spectacular money. And they did. In the 1980s, CEO compensation more than tripled, rising 212 percent. Some CEOs, by the decade’s end, were routinely taking in hundreds of times more pay than their average workers. Top executives at Fannie Mae and Freddie Mac, at least at first, found themselves on the outside of this CEO pay feast looking in. Their enterprises were doing the same work that Fannie had been doing since its New Deal creation in 1938. But the executive rewards for that work, in America’s new corporate pay environment, now seemed painfully modest. Fannie and Freddie execs, not surprisingly, sought in on the new CEO good times. They started looking for alternatives to their traditional business as usual that might start exciting Wall Street. If they could do that exciting, then they, too, could finally share in the windfalls showering down on America’s CEOs. The wheeling and dealing era at Fannie and Freddie had begun. The two mortgage giants would move quickly to get the green lights they needed to stretch their traditional role. They unleashed a ferocious lobbying blitz, spending millions to ingratiate themselves with legislative power-brokers. The lobbying would pay off. In 1989, for instance, lawmakers made rule changes that left the securities Fannie and Freddie marketed more attractive to investors. Other changes enabled Fannie and Freddie to start buying up mortgages for upper middle class housing. The two enterprises, once champions of lower-income households, were now championing any maneuver that promised higher short-term quarterly earnings — and using those higher earnings, critics would charge, to pump up profits, not help ease mortgage rates. By the mid 1990s, notes Washington Post analyst Stephen Pearlstein, Fannie and Freddie were pushing the envelope big-time. “Instead of just buying mortgages, insuring them and selling them in packages to investors,” Pearlstein points out , “they bought more of them for their own portfolios, using ever-increasing amounts of borrowed money.” The rewards for this financial derring-do? Fannie Mae CEO James Johnson was soon pulling in $5 million a year. His successor, Franklin Raines, took just four years to accumulate stock worth $17.4 million and stock options worth an additional $113 million. To keep these gravy trains running, Fannie and Freddie execs were willing to do anything, even cook their corporate books. At Freddie Mac, creative accounting manufactured $4.5 billion in phony earnings. At Fannie Mae, $9 billion of accounting “errors” would eventually have to be corrected. The Fannie and Freddie book cooking would eventually flame into the headlines in 2003 in 2004. Both Freddie's Leland Brendsel and Fannie's Raines would end up getting axed. Gently. Brendsel took up retirement residence in a $4.1-million country estate on Maryland’s Eastern Shore. Raines retired with $25 million in pension benefits. The boards of directors at both Fannie and Freddie, suitably embarrassed, piously pledged a new era of reform. They installed fresh CEO faces. But the boards left in place the same outrageously lucrative executive pay incentives that had so tempted Brendsel and Raines, in the process brushing off analysts from the Federal Reserve Bank of St. Louis who advised that “executive-compensation arrangements in particular” ought to be “an important component of the reform agenda.” The new Fannie and Freddie execs, if they played their cards cleverly enough, would now be able to win the same windfalls their predecessors went after. The new executives, predictably enough, promptly started their card playing. Instead of blowing the whistle on the speculative national housing bubble then inflating so obviously, Fannie and Freddie jumped head-first into the speculation, rushing recklessly into the subprime market. These new speculative games would help the top execs at Fannie and Freddie to sizeable personal fortunes. Freddie CEO Richard Syron would pocket $19.8 million in 2007, Fannie Mae CEO Daniel Mudd $12.2 million. Then came the subprime crash — and an end to the speculative games. Fannie and Freddie currently stand awash in staggering buckets of red ink, and Treasury Secretary Henry Paulson has executed a federal takeover that leverages tax dollars to save the two enterprises from total collapse. As part of the takeover deal, Freddie Mac CEO Syron and Fannie Mae CEO Mudd have been shown the door. Their chief executive successors, the Federal Housing Finance Agency has announced, will be taking home “significantly lower” paychecks, a stunningly candid — if long overdue — admission that outrageously high rewards really serve no socially redeeming economic purpose. Unfortunately, throughout the rest of our contemporary corporate casino economy, outrageously high rewards remain standard operating procedure. Average Americans, until that changes, will remain our economy’s most consistent losers. |
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America's Sorry Supply-Side Michael Ettlinger and John Irons, Take a Walk on the Supply Side. Center for American Progress and Economic Policy Institute, September 2008. If you ask fans of Presidential candidate John McCain’s tax plan why the senator wants to keep in place the Bush tax cuts for the wealthy, you’ll get a quick one-word answer: jobs. The lower the nation’s taxes, as McCain campaign economic aide Taylor Griffin argued last week, the more “positive feedback” on the economy as a whole, the better off everyone will be. Sound familiar? It should. The tax cuts for the wealthy and corporations in the McCain economic plan echo the “supply-side economics” that have dominated conservative tax policy ever since Ronald Reagan took office in 1981. The basic supply-side logic train: Lower tax rates translate into higher savings, higher savings translate into higher levels of economic investment that translate into economic growth — and good times all around. Most economists, back in 1981, viewed supply-side claims with considerable theoretical skepticism. But we no longer need to be debating theory, suggest economists Michael Ettlinger and John Irons in this just-published paper from the Center for American Progress and Economic Policy Institute, to determine if supply-side policies work. We have history. “The two supply-side eras that sandwich the period from 1993 to 2001,” Ettlinger and Irons posit, “offer us an opportunity to assess the impact of supply-side policies.” The first supply-side era hit the ground running in 1981 with a hefty tax cut on wealthy individuals and corporations. In 1993, the Clinton administration put the brakes on supply-side. Income tax rates on America’s wealthiest modestly increased. In 2001, George W. Bush launched supply-side two. Tax cuts for the rich and major corporations have been a fact of economic life ever since. So which of these eras generated the best economic results? In Take a Walk on the Supply Side, Ettlinger and Irons assess the historical record via a variety of yardsticks. They compare the economic eras since 1981 on not just jobs, but wages, household incomes, productivity, investment growth, gross domestic product, and federal budget deficit and debt. The upshot of all these comparisons: The supply-side eras delivered poorer results — by every measure. “The great economic success predicted by the tax cut advocates,” Take a Walk concludes, “simply did not occur.” Ettlinger and Irons write in clear, direct, jargon-free prose. With an election fast approaching that will decide whether supply-side gets four more years, this concise paper, available free online, could hardly be more timely. |
Stat of the Week The independent and nonpartisan Tax Policy Center, a joint initiative of the Urban Institute and the Brookings Institution, has just released an updated analysis of the McCain and Obama tax plans. Under the McCain plan, taxpayers making over $1 million in 2009 will average $91,286 in tax savings. These same taxpayers, under the Obama plan, will see their tax bill jump by an average $175,117. .
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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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William McGuire, the former CEO of Minnesota-based UnitedHealth, has paid deeply for his misdeeds. Or so it would seem. Last week, McGuire agreed to pay $30 million — and give up another $107 million in stock options — to settle a lawsuit pension fund investors 