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This Week

President Barack Obama, in the opening moments of his eagerly awaited administration, last week reminded an entire world that “a nation cannot prosper long when it favors only the prosperous.” Years of “greed and irresponsibility on the part of some,” he would declare, have contributed mightily to our “badly weakened” economy.

President Obama never identified that “some” in his inaugural address. He named no names. Most of his listeners likely thought about the kingpins of Wall Street and high finance as the new President spoke. But the greed and grasping that have melted down the global economy extend well beyond Wall Street.

Indeed, right on Inauguration Day, a corporate giant across the continent from Wall Street was quietly filing some required papers that dramatize just how overwhelmingly our troubled economy continues to favor “only the prosperous.” We have that story — and more — in this week’s Too Much.

Greed at a Glance

Jean-Marc Jacot, the top exec at luxury Swiss watchmaker Parmigiani, is whistling a happy tune these days. Last week, at a trade show in Geneva, Jacot confidently predicted that sales of Parmigiani watches — average price, $56,340 — will rise 15 percent in 2009. In 2008, sales actually fell over the year's last three months. How can Jacot be so confident that the slowdown that began last fall won’t continue? Explains the luxury veteran: “Maybe for a certain period you are not in the mood to buy and that is what happened for the last three months. It was more a question of mood, not money.”

John ThainMerrill Lynch no longer exists as an independent entity. The reeling banking giant, on January 1, officially became part of Bank of America. But the independent Merrill, the Financial Times revealed last week, went out with a bang. On December 29, Merrill CEO John Thain rushed an estimated $4 billion in bonus checks out the door. The total bonus pool, if divided equally, would have been enough to hand $65,000 to each Merrill Lynch employee. But equity, apparently, didn’t rank particularly high as a Merrill core value. Some highly regarded Merrill staff pocketed what industry insiders describe as “very attractive” payouts. Others received pink slips — and no bonus. In all, some 30,000 employees of the newly merged Merrill Lynch and Bank of America will shortly be losing their jobs. Thain is leaving, too. He “resigned” his new Bank of America management slot Thursday. No word yet on who will get his office. Thain, CNBC reports, last year spent $1.22 million redecorating it . . .

The shenanigans at Merrill Lynch and Bank of America may be of some interest to U.S. taxpayers. U.S. Treasury officials earmarked $25 billion for Bank of America and Merrill Lynch last fall, in the initial bank bailout, and another $20 billion earlier this month. Last week, the House of Representatives, in a move widely reported as an expression of “disgust” at the handling of the bailout so far, passed legislation that sets new restrictions on executive pay at bailed-out companies. The House legislation, introduced by Rep. Barney Frank and okayed by a 260-to-166 margin, “does place limits on bonuses and severance,” Institute for Policy Studies analyst Sarah Anderson told reporters last week. But the bill would still “allow the Treasury secretary to look the other way if bailed-out firms continue to hand executives excessive pay packages.”

Timothy GeithnerPresident Obama’s choice for Treasury secretary, Timothy Geithner, spent last week wiping egg off his face, $34,000 worth of it. That’s how much in taxes the 47-year-old failed to pay from 2001 through 2004. At a confirmation hearing Wednesday, Geithner repeatedly apologized, but he now faces the task of getting back into the good graces of the American people. How might Geithner do that? For starters, he could direct the IRS to launch a special catch-rich-tax-cheats offensive along the lines of the just-announced crackdown on the wealthy announced in the UK. A new anti-tax evasion unit in Britain’s tax agency will be targeting “high net-worth individuals” and searching for hidden assets and income. That might entail, for instance, scrutinizing sales records on luxury second and third homes. UK officials are hoping to reap £7 billion, or $9.7 billion, from the effort. In the United States, an analysis of IRS data documented last year, Americans who make between $500,000 and $1 million a year are underreporting their incomes by 21 percent, triple the “misreport” rate of taxpayers who make between $30,000 and $50,000 . . .

The U.S. economy may be stalled, but sales of high-end antique automobiles are continuing to blissfully motor along. At the just-completed annual auto auctions in Scottsdale, Arizona, pitchmen at one auction house, Gooding and Co., sold one antique Ferrari for $4.95 million and collected at least $1 million each on six other classics. Prices did dip somewhat for “run-of-the-mill muscle cars,” luxury auto journalist Tom duPont notes. But prices on “rarer cars with a documented history” showed no serious slacking. Sums up McKeel Hagerty, the top exec at an agency that insures luxury auto antiques: “The whole collector-car world was watching, fearing we would fall off a cliff. We didn't.”


Quote of the Week

“President Obama has a daunting list of troubles to take on, from wrapping up two wars to restoring the Constitution. It is encouraging, however, that he gave such prominent placement in his inaugural address to narrowing the nation’s wealth gap — and that he recognized that it is important not just as a matter of fairness, but for promoting the well-being of the entire country.”
New York Times editorial board, The Obama Speech: Haves and Have Nots, January 20, 2009


New Wisdom
on Wealth

Ford Gunter, Success and social change subjects of Outliers, Houston Business Journal, January 21, 2009. Best-selling author Malcolm Gladwell explains why social mobility in the United States will keep shriveling if the income gap in the United States continues to widen.

Heather Landy, Wall Street Bonuses Draw Scrutiny in Bailout's Wake, Washington Post, January 24, 2009. In the wake of widespread skepticism about the bailout's limits on CEO pay, President Obama has "asked his economic team to come up with new restrictions."



In Focus

Have You 'Hurd'? Greed Still Living Large

Hewlett-Packard, the world’s biggest computer company, last week rewarded a “successful” CEO. In a required federal filing, the California-based company revealed that H-P CEO Mark Hurd collected $42.5 million in compensation last year.

This lofty sum, Hewlett-Packard officialdom proclaimed, reflected the company’s “exceptional and sustained” performance ever since Hurd took the H-P reins in 2005. On Hurd's watch, annual revenues at Hewlett-Packard have bounded from $86 billion to $118 billion. In 2008, company profits jumped 15 percent.

Hewlett-Packard board members certainly do have reason to be pleased. But other stakeholders in H-P's “success” don't seem to feel like cheering.

Take, for instance, H-P workers. Shortly after joining Hewlett-Packard, flush with over $20 million in signing “inducements,” Hurd ended the H-P pension plan for younger employees and announced plans to cut a tenth of the workforce.

Hewlett-Packard is currently completing a second round of massive job cuts. In all, Hurd will soon have eliminated almost 40,000 jobs at H-P since his inaugural 2005 speech at the company’s Silicon Valley headquarters.

“Building a great company isn't all about a CEO,” Hurd announced in that address. “It’s a team sport.”

Hewlett-Packard customers don’t have much reason to cheer Hurd either. H-P has been busy squeezing every bit of revenue possible out of the company’s cash cow, printer ink. The last ink price increase, in October, upped costs to consumers by 9 percent, well over double the year's inflation rate.

H-P overall product quality and service, meanwhile, are regularly leaving consumers infuriated. PCWorld magazine, after surveying 44,000 readers, earlier this month rated Hewlett-Packard dead-last — among 10 computer makers — on reliability and service for laptops, dead-last for printers, and next to dead-last for desktops. 

How can H-P revenues and profits be rising in the midst of so much consumer angst? Easy. To be “successful” in Corporate America today, a CEO doesn’t have to run a company that delivers quality at reasonable prices. Today’s most “successful” CEOs can take a far less demanding approach to “growing” their companies. They can simply gobble up other companies.

subplugContemporary top execs acquire these other enterprises — usually by taking on huge quantities of corporate debt — and then claim the revenues of these other enterprises as their own. Instant success.

To pay off the subsequent debt, and keep their bottom lines sweet, these CEOs then lop off “redundant” workers in their newly merged operations. This merge-and-purge cycle, predictably enough, creates chaos in the workplace — and more frustration for consumers.

As Hewlett-Packard CEO, Hurd has wheeled and dealed his way to 31 mergers in just 46 months on the job. His biggest acquisition came last August when he bought up tech services giant Electronic Data Systems for over $13 billion.

Have CEOs like Mark Hurd, with all their wheeling and dealing, discovered the secret to an eternal “fountain of riches”? Or can they be stopped — before unemployment lines get still longer and consumer nerves get still more frayed?

At first glance, corporate honchos like Hurd seem home free. Congress and the new Obama administration are focusing most all their attention on companies now taking in bailout dollars. Hewlett-Packard isn’t asking for any bailout.

But that doesn’t mean that lawmakers and the White House have no leverage. Almost every major corporation in the United States, Hewlett-Packard included, is already benefiting handsomely from taxpayer dollars, either indirectly via special tax breaks or directly through government contracts and subsidies.

H-P’s new Electronic Data Systems subsidiary, to give just one example, took in $2.3 billion from federal contracts in 2007 alone.

By placing strings on these contracts, subsidies, and tax breaks, the federal government could start discouraging the outrageous rewards for top executives that create such powerful incentives for outrageous executive behavior.

In the last Congress, a number of lawmakers started moving in that direction. Their legislation, the Patriot Corporations Act, offered a preference in federal contract bidding to companies that pay their top executives no more than 100 times the dollars that go to their lowest-paid employees.

Among this legislation’s co-sponsors: a senator by the name of Barack Obama.

Last year, for the record, Mark Hurd’s $42.5 million take-home equaled somewhere around 2,000 times the pay of H-P’s lowest-paid worker. 

How much of that $42.5 million represents the “greed and irresponsibility” that President Obama denounced at his Inaugural? Hard to say. But the San Jose Mercury News last week did calculate how much Hewlett-Packard shelled out in 2008 for Hurd’s “business meals.” The food benefit came to about $181,000.

“Assuming three meals a day, every day of the year,” concluded the Mercury News, “that works out to about $165 per meal.”

Capital gains

In Review

The Charm of the Caymans

Government Accountability Office, International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions. Washington, D.C., December 2008. Publicly released January 16, 2009.

In their zeal to hit the CEO pay jackpot, America’s top corporate executives don’t just shortchange customers and browbeat employees. They cheat the government, too, out of billions every year in taxes. GAO reportBack in 1991, corporations reported to the government, as taxable income, 91 cents for every $1 of profit they reported to stockholders. By 2000, for every profit dollar reported to shareholders, companies were reporting less than 70 cents to the IRS.

What changed? Nothing less than the basic corporate mindset toward taxes.

A generation ago, top executives generally feared getting caught cheating on their corporate taxes. They worried that cheating charges would blemish their company image.

By the 1990s, image no longer mattered. Top execs were chasing after the CEO pay windfalls that Corporate America had started making available in the 1980s. Little else mattered. These execs now saw their corporate tax offices as profit centers pure and simple.

In this new climate, corporate tax lawyers and accountants have had one obligation and one obligation only: aggressively reduce the company tax burden. And they have successfully accomplished that mission, often by setting up semi-secret subsidiaries in offshore tax havens.

Two U.S. senators — North Dakota's Byron Dorgan and Michigan's Carl Levin — last year asked the Government Accountability Office to try to figure out just how many U.S. firms have established operations in havens like Barbados and the Cayman Islands, nations that essentially offer corporations a free ride on taxes and refuse to “exchange information with foreign tax authorities.”

Earlier this month, Dorgan and Levin released the GAO findings. Tax havens, these findings show, have become part of standard operating procedure all across the American business landscape. Of the 100 largest U.S. publicly traded companies, 83 have set up dummies in tax havens.

Just one corporate giant, Citigroup, has 90 tax haven subsidiaries in the Cayman Islands alone. Subsidiaries like these, Dorgan and Levin believe, are costing the U.S. Treasury $100 billion a year in lost revenue.

The two senators aren't estimating how much this massive tax avoidance is contributing to the personal take-homes of top corporate executives. But we don't need an estimate on that total to understand the basic dynamics at work here. The huge pay rewards top U.S. execs can pocket give them a powerful incentive to goose their corporate earnings by any means necessary.

To shut down corporate tax cheating, we need to curb that incentive. Until we do, the Caymans and their ilk will remain, to our Citigroups, simply irresistible.


Stat of the Week

The five years right before the global economic meltdown began, the Berlin DIW think tank last week reported, saw a steady concentration of wealth at Germany’s economic summit. In 2007, Germany's top 10 percent held 61 percent of their nation’s wealth, a significant jump over the top 10’s 58 percent in 2002. Despite this increase, Germany remains much more equal than the United States. Economist Edward Wolff puts the top 10 share of U.S. wealth at 69.8 percent. Germany currently boasts a population 27.1 percent as large as the U.S. population, but hosts only 6.7 percent as many households with at least $5 million in financial assets, a Boston Consulting Group study noted last fall.



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: