They don’t just make deals on Wall Street. They make myths. And last week Wall Street's myth-making machine was roaring at full throttle — after the news broke that America’s five top investment banks will this year shell out a record $38 billion in bonus pay.
To justify the financial industry’s annual bonus blitz, friends of Wall Street usually recycle some variation on that most elemental of investment banker fables, the wealth creation myth. Wall Street’s movers and shakers, we're assured, create fabulous wealth. They richly deserve an appreciable share of the wealth they create.
This year, that wealth creation myth rings a tiny bit hollow. Over the last 12 months, the movers and shakers of Wall Street have presided over a colossal loss of wealth. So what gives with the record bonuses? We have more in this week's Too Much.
Shareholders at Telstra, Australia’s largest phone company, are shouting a loud message against over-the-top CEO pay. But no one is listening. Shareholders in Australia have the legal right to vote on executive pay, and earlier this month, at the Telstra annual meeting, two-thirds of the votes cast opposed the near $20 million 
the Telstra board had okayed for CEO Sol Trujillo, a former exec at the Denver-based US West. Telstra board members, for their part, now plan to ignore the shareholder vote. The board pay committee chair, Charles Macek, says Trujillo’s critics “have no expertise whatsoever.” They also have no legal right to stop Telstra from paying Trujillo the $20 million. Australian law gives shareholders the right to only a non-binding “say on pay,” the same non-binding right Rep. Barney Frank is seeking for U.S. shareholders. Overall, a new study last week revealed, Aussie CEO pay has been increasing four times faster than average worker pay . . .
Our soon-to-expire 2007 may go down in history — as the first year that auto showrooms ever displayed current models with price-tags over $1 million. Two 2007 models, the Bugatti Veyron and the Lamborghini Reventón, now list in the seven digits. But today's most expensive motorcars remain antique classics. This past May, a Ferrari Testa Rosa built in 1962 auctioned off at $9.3 million. In all, 15 classic cars have sold for at least $2.8 million so far in 2007. What explains this booming market for antique autos? More folks “can afford them,” says Business Week, as “the rich get richer.”
Everybody can’t be rich. But everybody can afford a taste of luxury. That’s what the world’s top purveyors of luxury goods have been preaching over recent years. Outfits like Gucci and Louis Vuitton have been introducing “smaller, more affordable” versions of their high-end merchandise, and other retailers — Coach and Burberry, for instance — have concentrated on marketing “luxury accessories for the affluent middle-class.” But troubled economies are putting a crimp on what marketeers like to call the “aspirational” affluents, and luxury houses, in response, are scrambling for market share in that one demographic that’s still feeling no economic pain, the super-rich. These companies, the Wall Street Journal reports, are “trying harder than usual to distance themselves from the masses.” One consortium of luxury brands is now offering a $1.5 million Las Vegas vacation package that comes complete with $150,000 in jewelry . . .
The hottest economic competition in the world today? That, the British Guardian suggests, may be the escalating rivalry between global tax havens, jurisdictions that range from the Caymans and the Seychelles to Monaco and Liechtenstein. The fray has become so intense that the 26 cantons of Switzerland, the original home away home for the world's deepest pockets, have taken to competing among themselves. Swiss law ostensibly grants special tax favors only to foreign affluents domiciled in Switzerland at least 10 years, but cantons are cutting their own deals. Explains Thomas Geiser, a high-end realtor in Montreux: “People want the rich and famous to live here.” Not all people apparently. Earlier this year, the Swiss Social Democratic party protested the immorality “of ordinary Swiss paying more tax than the super-rich.”
What could be more frustrating than to be a senior law firm partner on Wall Street? You spend your days telling corporate CEOs what papers to sign and, at year’s end, you only have $2.05 million — the average partner profit last year at top New York law firms — to show for your efforts, less than a fifth of last year’s average CEO pay. Things may be changing. The National Law Journal is reporting a growing movement to jack up compensation for law firm chief execs. Notes Stan Kolodziejczak of PricewaterhouseCoopers: “Firms haven’t yet come to realize what they have to pay to keep that talent.” On the other hand, firms do seem to recognize they need to do more than offer $160,000 starting salaries to keep their low-level associates hitting the midnight oil. At Cravath, Swaine & Moore, associates who work late can have dinner from a four-star restaurant delivered on silver trays. Other firms are providing in-office tailoring and emergency nanny service. The even more considerate Fried, Frank, Harris, Shriver & Jacobson, a New York firm 600 lawyers strong, has psychotherapists on call — “to provide advice on issues including stress, anxiety, depression, and divorce.”
Quote of the Week
“While water may ‘trickle down,’ economic growth from the wealthy does not. For many countries in Asia poverty is no longer a problem of resource scarcity, but mainly of skewed distribution of national income.”
Neil Buhne, United Nations Development Program resident coordinator for Sri Lanka, Sunday Times, November 25, 2007
New Wisdom
on Wealth
Susan Douglas, Tax and Spend? Hell, Yeah! In These Times, November 20, 2007. A University of Michigan analyst points out that "taxing and spending" is what advanced nations do — "to promote equitable societies."
Rep. Barbara Lee, Fighting inequality, starting at the top, Calitics, November 21, 2007. Why we need legislation that would deny corporations tax deductions on any executive pay that runs over 25 times the pay of a company's lowest-paid worker.
Wall Street’s five biggest banks have so far this year written off over $26 billion in losses, with most of that linked to rotten investments in subprime mortgages. And over 42,000 workers in New York’s financial industry have, since January, lost their jobs.
Yet Wall Street bonuses for 2007, despite these torrential losses, are actually topping last year's levels. How can that be? Trying to answer that question is keeping Wall Street's myth-makers hopping.
Wall Street giants like Bear Stearns and Merrill Lynch, the mythologists acknowledged last week, are certainly registering big-time losses. But such powerhouses, the new myth goes, can’t afford not to shell out big bonuses.
“If Bear and Merrill plead poverty,” as Manhattan College's Charles Geisst opines, “they're going to lose all of their good people.”
But “good” people don’t lose billions betting on risky securities, do they? True enough, the myth-makers also concede. But not all Wall Street power suits, they add, have been dealing subprimes. Power suits who spend their time cutting merger deals, trading currencies, and underwriting public stock offerings have done just fine.
The bulk of this year’s bonuses, Wall Street’s cheerleaders are arguing, are going to these “successful” traders and bankers, not those wretches responsible for all that subprime unpleasantness.
And those subprime wretches, Merrill Lynch's new CEO, John Thain, resolutely promises, will be penalized and pay for their recklessness.
America's financial elite clearly expects a worried world to trust in executives like John Thain, a former co-president at Wall Street’s Goldman Sachs, the most profitable securities firm in the world. Should we? That question brings us to the third — and most novel — myth that emerged last week.
Some top guns on Wall Street, this myth holds, may indeed have messed up with subprimes. But we can all rest easy knowing that Wall Street still hosts — in Goldman Sachs — the most brilliant business people on the planet.
Unlike the Wall Street herd, analysts gushed last week, Goldman didn’t “barrel headlong” into subprimes. Goldman shares have actually jumped about 13 percent this year, at the same time Merrill Lynch, Bear Stearns, and Citigroup are showing 40 percent tumbles.
One Goldman Sachs director, Stephen Friedman, credits this success to Goldman’s “damn good talent pool,” a pool wide and deep enough to have produced such luminaries as Clinton Treasury Secretary Robert Rubin and current Treasury Secretary Henry Paulson.
Over half the bonuses Wall Street’s big five will hand out this holiday season — as much as $22 billion — appear to be going to the big fish in the Goldman Sachs talent pool. Goldman CEO Lloyd Blankfein, who pocketed $54.3 million last year, will likely see his 2007 take-home near $75 million.
In effect, the myth-makers are telling us, this year’s Wall Street bonuses essentially reflect well-deserved pay for outstanding performance at Goldman Sachs.
So should we all just relax, secure in the knowledge that Wall Street’s rewards are going to the smart and the savvy, not the reckless and the undeserved rich?
Probably not. Those smart and savvy types at Goldman turn out to make plenty of bonehead moves, too. The Global Alpha hedge fund that Goldman Sachs runs, for instance, entered this year with $10 billion in assets. The fund, Bloomberg news said last week, will end the year worth $4 billion.
The Goldman Sachs wisdom on subprimes appears somewhat overblown as well. Goldman may not have invested its own capital in subprime-backed securities, but the bank, the New York Times notes, “continued to package risky mortgages to sell to investors,” collecting lucrative fees in the process.
And those penalties for reckless Wall Street subprime traders that Goldman alums like John Thain are promising? Managing directors of mortgage securities will indeed see bonus cuts up to 60 percent over last year's bonus totals, researchers at the Options Group report, but they’ll still be averaging $1 million each in holiday bonus cheer.
So what do we have left when we strip away all the myths? Wall Streeters speculate. Wall Streeters gamble. Like gamblers everywhere, sometimes they win. Unlike other gamblers, they never really seem to lose.
Chuck Collins and Mary Wright, The Moral Measure of the Economy.
Orbis Books, 222 pages.
The holiday season is once again upon us, and this year, as in years past, countless people of faith are lamenting the rampant, nonstop commercial exploitation of what they feel ought to be a time for reflection.
“We live in a culture,” as Chuck Collins and Mary Wright remind us in The Moral Measure of the Economy, “that worships the marketplace.”
We’ve let market values, the two authors add, “virtually trump all our religious values.” The market is our shepherd, they note in a nod to theologian Harvey Cox, and we shall “want and want and want.”
Collins and Wright set out, in Moral Measure, to offer an alternative that draws from biblical teachings, a “Gospel economics” rooted in respect for the value of every person and the importance of caring for one another, what U.S. Catholic bishops, in a landmark 1986 pastoral letter, called the “solidarity of the human community.”
Collins and Wright make an apt team for the task.
Collins co-founded the Boston-based United for a Fair Economy a dozen years ago and now heads the Inequality and Common Good program at the Institute for Policy Studies. Wright has served as the national education coordinator for the Catholic Campaign for Human Development.
Taking Gospel economics seriously, these veteran activists explain, means first encouraging a “preferential option for the poor,” working to end both poverty and the social marginalization of poor people.
But we can’t help those at the bottom of our economic ladder, the two stress, if we keep a blind eye to “concentrations of wealth and power” at the top. The “financial clout of the few,” they show convincingly, is warping the public policies that determine how our economy operates and undermining our social cohesion.
Without this social solidarity, “our resolve to eliminate poverty” steadily erodes — and eventually disappears.
To reverse this dispiriting dynamic, Collins and Wright are urging people of faith to “push beyond the ‘gospel of the market,’” and they share ideas and inspiration for doing just that.
The two authors have come to know, from years of grassroots and national activism, many of the people and projects now working to make Gospel economics a daily reality, not just a Sunday homily. In the Moral Measure, they engagingly introduce these selfless souls to us.
Know any selfless souls who could use some help making sense of our current life-deadening economic inequality? Try introducing them, this holiday season, to this eminently eye-opening new Moral Measure.
Stat of the Week
Over 50 U.S. billionaires received federal farm aid subsidies in the two years before 2006, the most recent years with data available, the Scripps Howard News Service reports. Among the beneficiaries: five members of Wal-Mart founder Sam Walton’s family and nine heirs to the Hyatt Hotel fortune. The biggest of the payouts to billionaires: $306,627 for Whitney MacMillan, a Cargill agribusiness heir.
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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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