OLEAN -- If you get a call from one of those telephone pollsters asking if you think the United States economy is in recession, don't worry that you're not an economist and fret over your answer for too long. If you want to venture a good guess, just say yes, because it probably is.
And one of the big reasons the economy is in the dumper is corporate greed. The subject has popped up in this space before. If you don't like that accusation, tough. Turn to the sports page.
Our sterling federal leaders don't want us to use the "R" word because it might spread panic and fear, and keep the consuming non-rich public from wasting more of their hard-earned money on mindless shopping, thus hurting further the sacred "retail sector."
The recent rash of stories about investment bank mega-losses and endless TV portrayals of sad Bear Stearns employees cleaning out their desks set me in mind of similar circumstances I covered as a Washington reporter in the early 1990s when the savings and loan industry turned upside down following deregulation. S&Ls were failing all over the nation as their executives blithely looted deposits.
One of the most controversial was the colorful and charming chairman of Centrust Savings Bank in Miami, David L. Paul, who loaded up his $7 million, custom-built, company-purchased yacht with so many heavy gold-plated fixtures it almost sank at its moorings, and blew many millions more in government-insured depositor funds on items for his new 47-story office tower: imported Italian marble staircases, teak walls, fine china, gold plate in the headquarters restrooms (both sinks and toilet pipes), a $13.2 million Rubens old master painting (not a print, the real deal, which he hung in his home), Baccarat crystal, luxurious Oriental rugs, opulent knickknacks, rare first-edition books, an executive suite with working fireplaces (in Miami usable only when the air conditioning drove the temperature to the low 60s), gold-leaf ceilings and even a bullet-proof shower door in the chairman's personal suite.
Neither was his use of personal credit limited by borrowing prudence. The monthly mortgage payment on Paul's luxurious Miami home was $60,921. His smaller $233,000 sailing yacht was named Bodacious. Paul also had a corporate jet, upon which regularly flew selected members of the United States Senate, usually those on the banking committee.
Chairman Paul's admirable if extravagant tastes, sham stock swaps and bond trades, falsification of documents and other imaginative bookkeeping ventures eventually drew him an 11-year sentence in the federal keep, and cost federal taxpayers more than $1.5 billion. But the revelation that shocked veteran bankers, inquiring members of Congress in hearing after hearing, and members of the general reading and viewing public was the audit report that the high-flying Paul collected $21 million in salary, stock dividends and bonuses over the five-year period he controlled the failing institution.
Oh, the horror! Today's grandiose remuneration of Wall Street big shots who soak up oceans of investor money make poor David Paul look like a Boy Scout leader with a clinical lack of ambition.
Consider this: Even in a year featuring record losses and furious investors who consider themselves cheated, even in the financial industry's worst year since the dot.com recession of 2002, Wall Street's five largest investment banks doled out a record $39 billion (with a B) in "executive bonuses" at the end of 2007.
These five banks saw their profits drop more than 60 percent in 2007 -- and in all, Wall Street wrote off more than $90 billion in uncollectible "bad debt" during 2007 -- but here are the captains of finance richly rewarding themselves for overseeing a performance that now threatens to relegate the nation -- and perhaps the world -- to the economic cellar for years to come.
I can hear all you fiscal sophisticates scoffing: "Doesn't this dummy know that investment bank workers get relatively modest salaries, and rely on year-end bonuses to make up the difference, and live normally?"
Then change the template to what the rest of the country and business sectors do -- pay a living wage or salary, and save "bonuses" to reward superior performance, or by the withholding of which to punish poor performance.
Besides, there are more than 180,000 employees at these five big firms, and the lion's share of the bonus money was funneled to about 2 percent of them -- the few thousand high-level traders, managers, directors and senior executives who already have good salaries. The rank-and-file "backroom" clerical workers got a few hundred dollars each.
Even with this screwy income-based-on-bonus system, such investment banks and trading houses typically in the past have tried to keep the year-end compensation to such employees in recent years to about 40-45 percent of revenues. For 2007 -- with all the losses and questionable performance -- when the New York state comptroller totaled it up for the top five investment banks, the bonuses amounted to about 60 percent of revenues. Performance goes down, bonuses go up. Yeah, that's what capitalism is all about. You want names and numbers?
Stanley O'Neal, who started the year as CEO of Merrill Lynch, had to step down in October after the huge and venerable investment house lost 43 percent of its value, and had to write off $20 billion in bad debt from worthless housing loans when the "subprime" mortgage market started to collapse. (More on that in a few paragraphs.) O'Neal's severance package after this sterling performance? Some $161 million. That's about 3,500 times the annual income of a typical middle-class American household, if there is a middle class anymore.
The aptly named Charles Prince II took in $68 million in severance when he departed as chief executive officer of Citigroup as it reeled from like losses. But this is part of a contract, you argue? Of course it is. Then stop writing such contracts. They are detrimental to the common good. They are detrimental to investors. They are hurting this country.
One has to start digging for these comparisons in the mainstream media -- the MSM as bloggers call the formerly dominant sector of information. I had to resort to the World Socialist Web Site and writer Andre Damon (That's right! I'm quoting Socialists now!) to pick up two very important observations on this cracked system:
One -- Members of Congress and other major public figures are loathe to criticize these massive pay amounts, or call for hearings on this absurd financial structure. They use the excuse that executive compensation is a private matter between the shareholders and the executives, no matter the effect on the general public. I'll wager it has more to do with political donations.
Two -- Wall Street loves volatility, and loves a volatile year like 2007, in which bankers gambled and lost on risky securities. That's because compensation in the brokerage industry is tied to the increase in trading that accompanies volatility. Trades carry fees, buy or sell.
How did the big banks get in trouble in the first place? This is where "subprime" mortgage rates come in. Because nobody regulates nuthin' anymore, during Dubya's administration a new mortgage loan became popular in giving new homeowners the wherewithal to buy a house, the bedrock "solid investment" of American capitalism. In the old days, you'd typically have to put down 20 percent or so of the price, and then take out a mortgage of maybe a fixed 5 to 8 percent, depending on the ever-fluctuating rate, to pay it off over 30 years. You couldn't even get into the bank door if you didn't have a solid, established credit record.
What went wrong? Bankers and mortgage brokers started giving out "subprime" mortgages at teeny-tiny rates (2 or 3 percent, typically) called ARMs -- adjustable rate mortgages -- which would be "adjusted" after two or three years. This proved to be somewhat like calling your doctor's point of view an "adjustment" after he completed about half of your colonoscopy.
The banker would typically promise the borrower -- typically a first-time homeowner with low income and little credit and no other borrowing power -- a "new" rate after two years, one that was still cheap and a good deal.
Those promises were usually false. A 4 percent ARM on a $200,000 mortgage, for instance, would turn into maybe 9 percent, with big fees to cover the original "discount." Suddenly, the poor schmuck who was paying about 20 percent of annual income into the mortgage now faced payments equal to 50 percent of pre-tax income. Couldn't hack it. Went banko. Gave up the home.
Even as recently as the Clinton administration, these predatory lending practices were forbidden under federal law and such prohibitions were strictly enforced by state and federal regulators. Not today. Under Dubya's fine hand, the mortgage and investment sector of the economy was allowed to go hog-wild.
Greg Palast, a liberal writer for the British Broadcasting Corp. and frequent commentator on Air America Radio, observes that "it was now OK to steer'm, fake'm, charge'm, and take'm" as far as prospective homeowners were concerned.
Investment and commercial banks alike -- Merrill Lynch and Citibank and Bank America and others -- now got in on the partying.
As Palast wrote recently in plain language for Air America Radio: "They took a bunch of junk mortgages ... loans about to go down the toilet, and repackaged them into 'tranches' of bonds which were stamped 'AAA' -- top grade -- by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to U.S. school district pension funds and town governments in Finland" (among others).
But with more and more broke and reamed homeowners unable to pay their mortgages because of the usurious "adjusted" rates, homes were simply abandoned and given up. Pretty soon the once-lofty and increasing home prices, always based on the supply-and-demand "market" factor, began to fall. The plummet picked up speed.
"When the housing bubble burst and the paint flaked off," notes Palast accurately, "investors were left with the poop and the bankers were left with the bonuses."
People should go to jail for all this conniving, but they won't. My guess is that many more institutions -- banks and mortgage brokerages -- will fail because of these illegalities and their just desserts, and the feds will have to resurrect something like the Resolution Trust Corporation, a U.S. government agency created in 1989 to merge or close insolvent savings and loan institutions during a similar banking crisis. The RTC ran mostly on the sales of seized assets from liquidated S&Ls and saved many sick savings and loans by prudently dispensing funds. The RTC -- in essence a government-owned asset management company -- was quietly dissolved in 1996 after doing a good job and averting a major fiscal meltdown in America.
Of course, that whole thing occurred during the presidencies of two thinking leaders -- Bush the Elder and Bill Clinton. Don't look for such quick response during the current idiot's final year in office. We need a punisher of corporate greed, not a celebrator of such.
| Niagara Falls Reporter | www.niagarafallsreporter.com | March 25 2008 |