October 23, 2006

Is every CEO a crook? Over the last dozen days alone, one judge in Los Angeles has sentenced the former top exec at Homestore.com to 15 years in prison for inflating company revenues. Another judge, in Manhattan, has ruled that Richard Grasso must return up to $100 million of the $185 million he pocketed as the CEO of the “nonprofit” New York Stock Exchange from 1995 to his ouster in 2003.

In Minnesota, meanwhile, insurance giant UnitedHealth has eased CEO William McGuire into retirement after an internal company report found McGuire and a good chunk of his executive team had been regularly backdating stock options for fun and profit.

Some news reports have dubbed McGuire the biggest victim yet of the still exploding option-backdating scandal. “Victim” may not be quite the right word. We explain why, in this week's Too Much.

Greed at a Glance: Beyond the Bling, the 'Grill'

First buildings, then neckwear, now vodka. Billionaire Donald Trump seems determined to fix his name on anything that can be luxury branded. Trump's new “super premium” vodka will debut this week, at $40 a bottle. What's next for Trump the Brand? Whatever can evoke “over-the-top excellence," Trump last week told Brandweek. Meanwhile, Trump is currently thumping the media circuit for his new co-authored book, Why We Want You to Be Rich. The book's theme? Explains The Donald: "It's really turning out that there is no middle class. There's a poor class and there's a rich class, but there's very little middle class. We want our people and the people who buy the book to be on the rich side, not the poor side."

Yahoo last week announced a 38 percent drop in quarterly earnings, a financial body blow that almost immediately evoked fighting words from the cyberspace giant’s top exec. Declared Yahoo CEO Terry Semel: “I am not satisfied with our current financial performance and we intend to improve it.” Might some shareholders have reason not to be “satisfied” with Semel himself? Yahoo's CEO since 2001, Semel has already cleared $429 million in personal option earnings from the company, and he’s still sitting on an options stash worth another $236 million. Yahoo appears determined not to let that stash sink steeply in value. The company has just acknowledged plans to “buy back” from the open market up to $3 billion worth of its stock, a move that will pump up demand for Yahoo shares — and ensure Semel plenty of continuing fruits for his executive labors . . .

Can there be redeeming social value in a “reality” series that pits the rich, the middle, and the poor in competitive combat? Maybe. A huge TV audience in Colombia has just spent three months watching a Survivor-style “class struggle” that, claims the show’s producers, spotlights their violence-torn nation’s “glaring social inequalities.” The show’s “privileged” team started the competition — top prize, $150,000 — on a beautiful beach complete with servants, lobster, and chilled white wine. The “down and outs” started in a cold cave. By the show’s finale, many of the 18 competitors had become friends, with shoe-shiner Manual Velasco even inviting some of the “privileged” to his daughter’s birthday. But Velasco ended up with no prize money. The series, says one critic, ended up empty, too, as just another soap opera that peddles delusions about escaping poverty in a nation where the richest tenth takes home over 60 times more income than the poorest.

In the emerging new global ultra-luxury goods market, nobody worries about trade secrets. The reason? Everybody already knows the secret to winning ultra-luxury hearts and minds: Just add diamonds. The Geneva, Switzerland-based Goldvish company, for instance, has created three “diamond-encrusted Piece Unique mobile phones.” Each retails for $1.25 million. Too rich for your blood? The Houston-based jeweler Paul Wall has become the leading purveyor of “grill,” the hip new label for diamond caps that cover your teeth. Wall’s “Money in your Mouth” grill, notes the Financial Times, runs a mere $8,000 for ten teeth . . .

The new Boeing 787 Dreamliner, a plane due in service the year after next, will carry up to 330 passengers on regular commercial flights. But the “V.I.P.” version of the new Boeing, announced last week by Lufthansa, will carry just 35. This new V.I.P. model joins a growing list of full-size corporate jets now available as private planes. The V.I.P. figures to go for $150 million a pop. Lufthansa has already outfitted a dozen jumbo 747s for the private luxury market, at about $230 million each. These airborne palaces come with more than enough legroom. They can easily handle, one news report points out , both the complete entourages of their wealthy owners and “their Rolls Royces and racehorses.”

Behind the White House Budget Deficit Happy Talk

A quarter trillion dollars in red ink normally doesn’t come across as something to cheer. But White House officials have been cheering anyway the past two weeks, ecstatic over the news that the just-completed 2006 federal fiscal year ended with “only” a $248 billion deficit. Two years ago, the annual federal deficit stood at $413 billion.

Credit this deficit dip, says a White House desperate for happy news, to the Bush tax rate cuts. These “pro-growth” rate cuts, the claim goes, have stimulated the economy and generated, in the process, billions in new federal revenues.

Is the White House blowing smoke? The quick answer: yes. Federal tax revenues, to be sure, have been jumping. But that jump, the latest government stats make clear, reflects growing inequality far more than a growing economy.

The story in a nutshell: Wealth is now concentrating so intensely at the top of America’s economic ladder that America's very richest — despite paying a substantially lower percentage of their total incomes in federal taxes — are shelling out more tax dollars to the federal treasury.

At the same time, despite lower corporate tax rates, corporations are shelling more tax dollars, too, because corporate profits have hit new record levels, growing at a 13.7 percent annual rate, about double the average of all the other economic recoveries since World War II.

Higher corporate profits, notes the Center on Budget and Policy Priorities, translate directly into higher incomes for the already wealthy, since wealthy households own the vast bulk of corporate stock.

Meanwhile, down a ways on our economic ladder, average Americans are collecting less and less of our national income. The share of this income going to wages and salaries, the Commerce Department reported last month, sank in the first half of 2006 to just 51.8 percent, the lowest share since statisticians began tracking that figure in 1929.

“The very rich are pulling away from the ordinary rich and the middle class,” sums up Brookings Institution economist Isabel Sawhill. “Those very rich people pay higher tax rates. When the distribution of income shifts upward, as it has in recent years, you get a revenue kicker from that.”

A Modern Medical Miracle: William McGuire's Fortune

You won’t find anything terribly original in the corporate career of William McGuire, the veteran CEO kicked into retirement last week by insurance mega giant UnitedHealth.

McGuire didn't do much to break new ground over 14 years as the company’s top exec. He simply followed the standard contemporary American CEO playbook. He merged, he purged, he gouged, and he cheated his way to personal fortune.

The cheating — on stock options — has now come back to bite McGuire. On his way to pocketing over $520 million in compensation from 1992 through 2005, charges a law firm report commissioned by UnitedHealth last spring and released a week ago Sunday, McGuire had his options repeatedly “backdated.”

Three different times McGuire picked up massive option grants from the UnitedHealth board that gave the CEO the right to buy company shares at what turned out to be the stock’s lowest price of the year. Nice coincidence.

Another time, McGuire had the UnitedHealth board “suspend” 750,000 of his options that had become next to worthless after the company’s share price slumped. The board then kindly replaced the suspended options with new options, all much more potentially profitable. Months later, after a spike in the UnitedHealth share price, the board “reactivated” the suspended options. Bottom line: a $250 million windfall for McGuire.

McGuire, of course, didn’t spend all his time as CEO conspiring with the UnitedHealth board to supersize his personal net worth. He did devote time to actually running the company. That work, in large part, revolved around plotting a series of mergers that turned UnitedHealth into the 800-pound gorilla of America’s medical marketplace.

One in six Americans, the Washington Post noted last week, now pay insurance premiums to UnitedHealth. These one in six Americans aren’t benefiting particularly much from the “economies of scale” that mergers in the health insurance industry were supposed to create.

Back in 1987, as New America Foundation health policy director Len Nichols noted last week at a forum on the at-risk American middle class, premiums for a typical family health insurance policy ate up 8 percent of the income for a typical American family. That same policy today chomps away 19 percent of typical family income.

Health insurer mergers, on the other hand, have worked wonders for companies like UnitedHealth. During McGuire’s CEO tenure, for instance, the UnitedHealth share price soared over fifty-fold.

For this fine performance, McGuire will continue to be rewarded, despite the backdating scandal. On December 1, the day he formally steps down as CEO, McGuire will walk away with retirement payouts, options, and assorted other benefits worth a potential $1.1 billion.

We have more on William McGuire.

Stat of the Week: Erecting Excess in Construction

The year's broadest survey of CEO compensation, just published by the Conference Board, reports that top executives in construction made more in 2005 than top executives in any other sector of the economy. The Conference Board data cover 3,075 companies, almost twice the number of enterprises monitored by the second-biggest annual executive pay survey conducted by the Corporate Library. Median total pay in construction last year hit $2.6 million. Median total compensation for members of corporate boards of directors, the people responsible for determining CEO pay, now stands at $109,000, “up from $91,250 in 2005,” according to Conference Board figures also released last week.

Quote of the Week: A Conservative on Inequality

“In the course of the 20th century, there were several eras of growing economic inequality. On a few occasions, they came to an end in a relatively gentle way, with democratic elections and more egalitarian legislation.
"More often, however, they were ended by a catastrophe, such as the Great Depression, a violent social revolution or a world war. When the rich went out, it seems, they normally did so with a bang, and not with a whimper. The way things are now going, it is likely to be so in the future."
James Kurth, Swarthmore College political scientist, Dallas Morning News, October 15, 2006, from an essay that originally appeared in the American Conservative magazine

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