April 23, 2007
On Friday, as expected, the U.S. House of Representatives okayed the first significant CEO pay reform in years. By a 269-134 margin, lawmakers gave the nod to a bill that gives shareholders the right to vote, on an advisory basis, on how much executives make.
If suitably informed and empowered, this House legislation assumes, shareholders can and will act as a brake on executive pay shenanigans that subvert the public interest.
Shareholders, recent history shows, certainly can sometimes play an important braking role. But sometimes not. Case in point: last week’s buyout of Sallie Mae, the nation’s biggest student loan company.
Shareholders at Sallie Mae are welcoming the buyout. Students have reason to fear it. We have the story in this week’s Too Much.
The world’s top luxury cellular phone maker, Nokia’s Vertu division, has just unveiled a new product line for 2007. The price-tag on the new line’s top-end model: $310,000. Who’s buying phones that retail in the six digits? Vertu, Reuters reports, is marketing at swells whose idea of a fun day includes “breakfast in London, shopping in Paris and a late dinner in New York.” One of Vertu’s new phones comes wrapped “in a diamond-perforated leather” specially treated to resist “almost everything from lipstick to suntan lotion.” Vertu sales jumped 140 percent last year. This year, a Vertu flack predicts, the Nokia luxury division will sell 100,000 phones . . .
Deep pockets who’d like to put down some roots in London, not just breakfast there, have a new option. The Candy brothers Nick and Christian, two hot young developers who specialize “in dream homes for the ultra-rich,” are now entertaining offers for units in their new Chelsea Barracks complex. Among the first buyers: the foreign minister of Qatar, who’s reportedly shelling out $200 million to call the Barracks his home away from home, almost four times the previous UK record price for an apartment. Due to be complete in 2009, all the Chelsea Barracks units will feature 24-hour room service, baths “hewn from wood,” floor-to-ceiling refrigerators, and “panic rooms” where residents can hide in safety should burglars get past the development’s eye-scan security . . .
If you haven’t yet made a move for a sweet spot in the Hamptons this summer, you may be out of luck. The choicest beachfront properties on Long Island’s East End — the favorite hot-weather haunt of New York’s glitterati — are going quick. That’s a relief for local realtors, who, for a brief moment last fall, feared a housing bust. That hasn’t happened. Notes Alice Bell, a Sotheby’s agent: “There was a lot of talk about the bubble bursting. But for properties above $7 million the bubble did not burst.” Bell is currently showing an eight-bedroom, 2.5-acre home priced at $45 million. She expects no problems finding a buyer. How can she be so sure? Explained Bell earlier this month: “Homes that are reasonably priced are attracting a lot of attention.”
Nearly half the CEOs who appear in USA Today’s latest annual executive pay tally, released last week, took 
home at least $10 million last year. George David, the top exec at defense contracting giant United Technologies, grabbed over twice that, $23.4 million, a sum that includes “$612,000 worth of personal use of the company’s aircraft.” Meanwhile, Stanford University’s Graduate School of Business last week highlighted research on the “psychological effects” of excessive executive pay. A quarter-century of research, the Stanford Business School relates, shows that “inordinate wage gaps” go hand in hand with “lowered productivity, loss of group cohesion, lower quality, and even theft.”
The first space race of the 21st century — the competition to place the awesomely affluent into orbit — is heating up. This past weekend, billionaire Charles Simonyi touched down two weeks after a Russian rocket dropped him off at the international space station. Simonyi, the fifth tourist in space, spent over $20 million on his heavenly seat. Space Adventures, the Virginia-based company that has so far dominated the space travel trade, booked Simonyi's trip. But Space Adventures now has rivals. Microsoft co-founder Paul Allen and Virgin Air mogul Richard Branson are developing their own spacecraft to shoot deep pockets — for a stiff price — up, up, and away. Space Adventures CEO Eric Anderson, for his part, isn’t running scared. He’s currently making plans for the first tourist jaunt to the moon. The target date: 2011. The price per seat: $100 million. Retired NASA astronaut Norman Thagard, an Anderson adviser, sees only upside in the effort. Explains Thagard: “I think there’s already a market — there are hundreds of billionaires in the world.”
Quote of the Week
“Income disparity undermines our democracy. It means that the very rich decide which Republican or Democrat will govern us. The executive with a huge tax break, or the corporate czar who can afford a bed at the White House, is the man (or woman) who governs us.”
Rev. John Muehlke Jr., Pemi Valley Church, Laconia (New Hampshire) Citizen, April 17, 2007
New Wisdom
on Wealth
Chuck Collins, Let's Rein in CEO Salaries, Wichita Eagle, April 17, 2007.
Dean Baker, Containing CEO Pay: A Case of Government Efficiency. April 17, 2007. U.S. cabinet secretaries oversee departments that spend hundreds of billions annually, yet earn only $183,500 a year, notes economist Dean Baker. So why are CEOs waltzing off, on average, with $10 million?
Thirty-five years ago, Congress created a quasi-governmental corporation to help kids from modest-income families afford college. This new student loan company, soon to be known as “Sallie Mae,” had a simple mission: to expand the middle class.
Last week, an elite assortment of Wall Street bankers and private equity takeover artists announced a $25 billion deal that hands them total control over Sallie Mae – and completes a process that has turned the company’s original mission upside-down.
An enterprise originally created to expand the middle class now stands exposed as a racket that shifts middle class wealth into the pockets of the already wealthy.
Those already wealthy include Sallie Mae’s current CEO, Tim Fitzpatrick. An analysis by TheStreet.com estimates that Fitzpatrick may clear as much as $257 million from Sallie Mae's sale. The moving force behind the buyout, Sallie Mae chairman and former CEO Albert Lord, “may make even more than Fitzpatrick.”
The banking and law firm power suits who are shuffling all the paperwork on the Sallie Mae deal will do quite nicely as well.
Last year, $717 billion worth of takeover deals generated $34.9 billion in fees for Wall Street investment houses, law firms, and assorted other high-finance hangers-on. If that same fee-to-deal ratio holds for the Sallie Mae takeover, Wall Street investment houses and law firms will collect, for their student loan industry wheeling-and-dealing, about $125 million in fees.
Shareholders in Sallie Mae still must approve the company’s sale. But no one anticipates any problem getting that approval. The takeover unveiled last week gives shareholders 50 percent more for their shares than they would have received if they had sold their Sallie Mae shares at the company's trading price earlier this month.
Amidst all these windfalls, who’s not going to do well from the Sallie Mae ownership swap? Just students and their families.
The Sallie Mae deal, analysts note, will reduce competition in the $85 billion student loan business. Last week's deal, by merging Sallie Mae with two of its top banking competitors, will give a single enterprise control over as much as 40 percent of the student loan market.
Students are already paying interest on their college loans at rates that can hit as high as 19 percent. With less competition, loan rates figure to have nowhere to go but up.
That will mean, quite simply, more debt for graduating college students. In 2004, half of all college graduates stepped out into the future at least $17,000 in debt, over twice the debt load of the typical college graduate back in 1993.
And that brings up an even more basic question: Why should students need to go in debt to get a college education in the first place? We don’t expect students to pay for high school. Why should qualified students need to pay for college?
Some nations in the world have already answered that question. They make college free for students who qualify academically.
In the mid 20th century the United States appeared headed in that same direction. New York City students could choose from a collection of outstanding free-tuition public four-year colleges. California invited all high school grads to extend their public education, by two years, in tuition-free community colleges.
In that United States, a much more equal nation than the top-heavy nation we have now, a decidedly progressive tax system taxed the rich to fund programs that would expand the middle class.
Now we squeeze that middle class with programs that enrich America’s upper reaches. Sallie Mae’s sorry evolution aptly symbolizes this shift — and will likely speed it along.
The number of “ultra-rich” households in the United States — those households worth at least $5 million, without counting a primary residence — has topped the million mark, says a new study from the Spectrem Group, a Chicago-based marketing data company.
Down a ways on the economic ladder, says the Census Bureau, more Americans are living in poverty. Census researchers, using a poverty yardstick developed at the National Academy of Sciences, are estimating that 41.3 million Americans, 14.1 percent of the nation’s population, “cannot afford the requisites of modern life.”
What’s this growing inequality likely to mean? Kim Bloomquist, a senior IRS economist in Washington, D.C., has an unusual answer: more tax cheating.
Bloomquist’s research, spotlighted last week in the Washington Post, has found a “statistically significant relationship” between widening gaps in income and rising rates of tax fraud.
The “more people you have at the upper and lower ends of the income spectrum,” Shankar Vedantam notes in an analysis of the Bloomquist research, “the more tax evasion you are likely to see.”
This pattern appears to hold internationally, not just in the United States. The higher the inequality in a nation, for instance, the larger the “shadow economy,” that gray zone where income goes unreported.
In the relatively equal Netherlands, the “shadow economy” amounts, in size, to only “13.4 percent of the legitimate economy.” In Mexico, a nation twice as unequal as the Netherlands, the shadow economy is running at 49 percent the volume of legitimate economic activity.
Stat of the Week
Candidates for the Republican and Democratic Presidential nominations raised a record-breaking $157 million in campaign contributions over this year’s first three months. Eighty percent of those contributions, the Campaign Finance Institute reports, came from donors affluent enough to afford to give at least $1,000 to the candidate of their choice.
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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