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March 10, 2008 |
| This Week | |
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Home foreclosures in the United States, the Mortgage Bankers Association reported last Thursday, are now running at an all-time record high. America’s homeowners, the Federal Reserve Board noted the same day, ended 2007 with more debt on their homes than equity in them — the first time that has ever happened since the Fed started tracking debt and equity data in 1945. Meanwhile, also last week, the IRS revealed that the average annual income of the 400 richest American taxpayers has catapulted from $46.8 million in 1992 to $213.9 million in 2005. Could these phenomena — hard times for average American homeowners and blissfully lucrative times for America’s mega rich — all somehow be related? Last Friday, a congressional hearing created the perfect opportunity to pose that intriguing question. We explore what happened with that opportunity in this week’s Too Much. |
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| Greed at a Glance: Servants Everywhere | |
The mortgage lending crunch and collapse, analysts predict, may soon spread to credit cards — as consumers denied access to home equity Britain, the Times of London reports, has become “a nation of butlers.” London’s status as the world’s hippest haven for the super-rich is mustering up a new servant army, a “phalanx of personal helpers” for the wealthy. The UK’s “helping professions” now include personal publicists, art consultants, private tutors, bodyguards, and “jewelry curators,” specialists “paid to pick up gems around the world.” The servant job category in most demand? That could be the private jet pilot. As one socialite told the Times: “Pilots are the new chauffeurs.” Meanwhile, a new Guardian/ICM poll notes that 75 percent of Brits now believe their nation’s “gap between high and low incomes is too wide,” the “highest ever level found.” America’s wealthiest art collectors may be more creative, the Los Angeles Times revealed last week, than the artists whose works they so covet. Only the wealthy don’t apply their creativity to canvas. They express themselves through creative accounting. Wealthy Americans, the IRS inspector general’s office has found, are routinely overvaluing the artwork they donate to museums — and the IRS remains too understaffed to stop them. In 2004, the IRS “checked only seven of the 108,554 tax returns with donations of art.” These checks found 184 artworks valued, on average, at triple their actual worth. America’s rich annually claim about $1 billion in tax write-offs for donated artwork. Former U.S. Labor Secretary Robert Reich wants the law on artwork tax deductions overhauled. Says Reich: “We’ve created a giant loophole right now through which the rich reduce their taxes by supporting culture palaces frequented primarily by themselves.” Remember the record turntable? The folks at Goldmund, a Swiss electronics company, do. They manufacture a $300,000 record spinner for music-lovers still partial to vinyl. But Goldmund is also going after deep-pockets with more up-to-date techno lusts. Last year, the company started marketing home-theater systems in the United States. The power cords alone for a basic Goldmund system can total $7,500. A full system, with 56 speakers, can cost about $1 million. Such systems take up considerable space. Goldmund, one news report notes, won’t even consider installing a home theater on any yacht shorter than 150 feet . . . Local running groups across the United States are lacing up for what could be their toughest race ever, the competition to see who will run running. Until recently, nonprofits have dominated the road racing scene, every year sponsoring hundreds of races that raise funds for hometown charities. But the big boys — led by the New York-based Falconhead Capital private equity group — are now muscling in, buying up races around the country at such a rate that the Road Runners Club of America now fears “the Wal-Martization of running.” But help is coming — from the U.S. Marines! The Marines already run the world’s seventh-largest marathon. They last month announced plans to run seven more races. Private equity groups, notes Marine Corps Marathon director Rick Nealis, “have to satisfy a bunch of investors, they need to return a profit.” Pledges the Marine running chief: “I know a lot of people would love to buy us out, but we're quasi-government and that just won't happen.” |
Quote of the Week “You look at these numbers, and it makes it hard to believe that Congress should repeal the estate tax.” New Wisdom Rachel Beck, CEO Pay Rise Shenanigans, Associated Press, March 7, 2008. The AP’s top business analyst explains how corporate boards are “moving the goal posts in a way that all but guarantees executives will score big paydays.” . |
| In Focus: CEOs and the Mortgage Mess | |
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The House Oversight and Government Reform Committee last week brought to Capitol Hill three CEOs from companies neck-deep in America’s mortgage muck. At the height of the housing boom, all three took home annual incomes that placed them right near the summit of America’s top income-earners. At Citigroup, CEO Charles Prince pocketed $110 million before stepping down last year. He left with an exit package worth $68 million. At Merrill Lynch, CEO Stan O’Neal also resigned last year. He carted away $161 million. At Countrywide Financial, chief exec Angelo Mozilo cleared $120 million in 2007 on stock cash-outs alone. These three CEOs share something else in common — besides prodigious paychecks. All three have led their companies into financial chaos. Citigroup, Merrill Lynch, and Countrywide, over the second half of last year, together racked up $20 billion in subprime mortgage-related losses. “It seems,” Rep. Henry Waxman, the chair of the House Oversight Committee, noted at last week’s hearing, “like CEOs hit the lottery even when their companies collapse.” “When companies fail to perform,” Waxman would go on to ask, “should they give millions of dollars to their senior executives?” Republicans on Waxman’s panel didn’t particularly like that question — or anything else about Waxman’s hearing. They called the session an exercise in scapegoating. The nation, Virginia’s Tom Davis argued, would be suffering a housing crisis even if CEOs hadn’t been paid anything. The three CEOs, predictably enough, endeavored to echo that perspective in their testimony. They painted themselves as the victims of an “unprecedented meltdown in credit markets,” as Merrill Lynch’s O’Neal put it, that no one could have possibly foreseen. Other witnesses at the hearing would challenge that not-our-fault defense. More importantly, their testimony raised fundamental questions that went considerably beyond committee chairman Waxman’s concentration on excessive pay for CEOs who “fail.” Indeed, the testimony from these witnesses suggests, the real problem with CEO pay may not be windfalls for failure. The real problem may be the windfalls themselves — and the incentives they create for socially destructive, even criminal, behavior. In effect, lawmakers probably ought to be probing more than pay for performing poorly. They need to be asking a deeper question: What happens when corporations tell CEOs they will get paid a fortune if they “perform” well? That’s exactly the message today’s corporate boards are routinely sending, as John Finnegan, the chair of Merrill Lynch’s compensation committee, told Waxman’s hearing Friday. “We pay for performance,” Finnegan announced proudly. “Our executives must produce tangible results measured against pre-established performance objectives.” If those execs measure up, if they “make their numbers,” ample rewards will be theirs. Countrywide’s Angelo Mozilo, for instance, took in $460 million in pay from 2002 through 2006 and collected another $414 million selling off chunks of his Countrywide stock. “As our company did well,” Mozilo said Friday, “I did well.” To be more exact, Mozilo did whatever he needed to do to make sure his company did well. The FBI is now investigating whether Countrywide has “misrepresented its financial condition and the soundness of its loans,” as part of a broader Justice Department review that’s examining fraud charges that involve over a dozen mortgage companies. Outrageously generous rewards — at Countrywide and throughout the financial industry — appear to have given executives an incentive to behave outrageously. Corporate boards, as a Business Week analysis of the Waxman hearing notes, “may have contributed to the mortgage boom and financial bust by encouraging their celebrity CEOs to take risks so they could make even bigger numbers.” Corporations have, of course, plenty of risk-assessors to keep their companies from tottering too near the fiscal edge. What happened to these risk-assessors at the height of the housing bubble? “Were they overruled,” asks Dennis Schaal, a responsible corporate governance expert on hand at last week’s hearing, “by greedy execs who could stomach massive risk as they were pumped up with visions of gargantuan compensation packages and unending profits?” The answer Friday from William Galvin, the Massachusetts secretary of state: absolutely yes. Galvin's testimony explained how banking giants like Merrill Lynch have maneuvered local governments looking for safe investments into repackaged pools of subprime mortgage loans known as collateralized debt obligations, or CDOs. Major investment banks, notes Galvin, have made a fortune marketing this risky paper, a process known as “securitization.” The end result? Testified Galvin: “What we are left with, when the dust settles, is mortgage originators, investment banks, and their CEOs walking away with unworldly profits derived from subprime lending and securitization — and unwitting investors and would-be homeowners trying to repair the damage to their lives and communities.” About half the subprime loans Wall Street securitized in 2006, added witness Susan Wachter, a housing expert at the University of Pennsylvania’s Wharton business school, are now expected to default. The investment houses that did that securitizing — Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns — all “posted record net earnings” in 2006. Investment banks, Wachter told last week’s House hearing, have been “indifferent” to the risk of the mortgage-back securities they've been hawking because they had an incentive to be indifferent. The greater the volume of shaky loans “originated, underwritten, and securitized,” the grander the resulting compensation windfalls. “Incentives,” the Wharton analyst concluded, “are an important element of the current debacle in subprime mortgage markets.” Lawmakers at last week’s House Oversight Committee hearing didn’t really give those incentives — the vast rewards for executives widespread throughout Corporate America — much attention. But maybe that’s okay. Committee chairman Waxman now has ample incentive to do a follow-up hearing — on the impact of paying CEOs extraordinary sums for “success.” |
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| In Review: Egalitarian Corporate Lawyers | |
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Shared Economic Growth: Wouldn’t That Make More Sense? A simple question: Where’s America’s cash? Certainly not with average Americans. If average Americans had cash in their wallets, they wouldn’t be maxing out home equity lines of credit to pay off monthly bills. They wouldn’t be losing homes, at record rates. And our consumer spending-dependent economy wouldn’t be sinking ever deeper into recession. So who has the cash? News reports last week supplied one answer. Corporate CEOs are now sitting on the biggest cash hoard in modern business history. In February, the nation's top 500 companies were sitting on $600 billion in cash, triple the cash that sloshed away on S&P 500 balance sheets just ten years ago. This enormous stash, if circulated back into the domestic economy, could stimulate the United States right out of recession. But top corporate execs aren’t investing in America. They’re shifting jobs overseas instead — and investing only in schemes, like buyouts of other companies and buybacks of their own corporate shares, that line their own pockets. Not a pretty sight, and Matt Lykken, for one, has seen enough. A corporate tax attorney, Lykken has joined with two other corporate tax lawyers, Laura Hunt and Heléna Klumpp, to launch “Shared Economic Growth,” a campaign to overhaul the U.S. tax laws that encourage U.S. companies to offshore their operations. To end the incentive for going offshore and “encourage companies to bring home the cash they have invested abroad,” Lykken and his colleagues want to let corporations deduct off their taxes any dividends they pay out. That would lead to bigger dividends, they posit, and these bigger payouts would put cash in the pockets of average Americans who own shares of stock. But wouldn’t bigger dividends also generate windfalls for the rich? The Shared Economic Growth plan would stall these windfalls by upping tax rates on America’s wealthy. The plan would eliminate all preferential tax treatment of capital gains income and impose an additional 7½ percent tax on individual income over $500,000. These two moves would over double the tax rate on a typical hedge fund manager’s $100 million annual income. Lykken and his corporate tax attorney team are building a detailed case for their reform approach online. But their work’s real significance may be the light their proposal shines on the growing opposition — within corporate ranks — to America’s continuing concentration of income and wealth. Over a hundred years ago, a high-powered corporate lawyer inspired a similar opposition. Disgusted by the gross inequality of his day, this corporate lawyer — Louis Brandeis — began battling for reforms to topple plutocracy in America. He would eventually gain a seat on the U.S. Supreme Court and help forge the political consensus that cut America’s rich, in the mid 20th century, down to democratic size. The corporate tax lawyers behind Shared Economic Growth are reviving that Brandeis spirit. And that revival matters, more than the specifics of any reform proposals. If even corporate tax lawyers are decrying our top-heavy status quo, a new assault against concentrated wealth and privilege may finally be in the offing. |
Stat of the Week Between 1995 and 2005, America's top 400 taxpayers more than doubled their share of the nation's income. After taxes, the average top 400 taxpayer took home 3,130 times the income of 2005's typical American household. |
| About Too Much | |
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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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loans run up more and more charges on their plastic. But this crisis hasn't yet reached the executive suites of America’s top credit card companies. Life in those suites remains as sweet as ever. Last month, American Express announced the 2007 take-home for CEO Ken Chenault: 