Monday, March 23, 2009

How much is this worth?

Huffington Post | Business Week | ABC News


At the core of the bonus tax bill is a mistaken notion that legislations can be used willy nilly at the whim of politicians according to the wind of populist sentiments. That was how the French Revolution became murderous, the McCarthy era of fear ruled out Communists, and totalitarian Soviet ruled on everything political and economic. Legislation is not the answer to micro-manage a global economic recovery.

At the core of the financial sector compensation controversy is not only the issue of bonuses awarded to the very people who created the mess, but all the people who work in the financial sector, manipulating wealth, using other people's money. When Soviet Union fell apart, people thought it was proof that communism was a failed doctrine and free market economy was the gospel for a new world order. They only got it half right. Communism as practiced by the totalitarian regime of the Soviet Union was a failure, but the jury is still out on the success of free market economy. There are many variations which do not work, and some variations which work better than others, including the mixed system of free market communism of China.

At the core of the debate over how much to pay bank executives, indeed, all executives, is the answer to the question, what is the worth of their output? The pro-executive side would claim market prices. In a market that is essentially controlled by the executives themselves, it is the same as allowing themselves to set their own worth. And we have seen the result of that in the past eight years.

This scandal is the same exploitation in the early days of the industrial revolution, when those in power, the capitalists who controlled the means of production, exploited those who produced the wealth, but did not have power, the labor. The only difference is that those in control of the means of production now, are the executives and board of directors in control of the banks and multinationals. In addition to paying the poorest bare subsistence wages, these powerful people also pay themselves exorbitant compensation. A comparison of the ratio of the compensation paid to the CEO of an average company to that of the average hourly worker, from around the world and over the past century, will tell the story of escalating inequality. As an example, a $50 million annual compensation (including bonuses and stock options) divided by a $50 thousand annual salary of an average worker, is 1000 to one. How is executive performance measured? By the increased value of the stock? By the increased output of the company? By the number of employees? By the overall health of the company?

There is no fixed formula to the answer of that question, and that is why no singular legislation can correct the inequality inherent in the system. The exploitation of the industrial revolution is alleviated using a system of legislation aimed at removing child labor, allowing union formation, setting minimum wage standards, regulating safe and acceptable working conditions.

The same system of oversight and regulation will be required to ensure compensation equality so that those in power cannot skimmed the profit from the top to benefit themselves, and leave the husk for the poor yearning masses. A simplistic 90% tax on all bonuses is both inadequate and excessive at the same time. It is a piece of badly thought out legislation. Secretary Geithner proved his mettle to stand up against such excesses.


(Huffington Post) Treasury Secretary Timothy Geithner refused to endorse a congressional effort to heavily tax bonuses issued by TARP recipients, saying that the government needs to balance rightful outrage over executive compensation with the need to ensure a quick financial recovery.

Geithner's words come as other members of the Obama economic team and high-ranking Democrats in the United States Senate have cast skepticism on the House's legislation. On Sunday, Jared Bernstein, the chief economic adviser for the vice president, said "the House bill may go too far," in terms of "using the tax code to surgically punish a small group."

"The risk we face for the economy as a whole is that after a period where there was just much too much risk taking, that right now the system is not going to take enough risk to get through this," Geithner said. "As so, right now, we have to find programs that make it possible for investors to take the risk they need so that we get out of this sooner. That will require confidence among investors that there are clearly established rules of the game, going forward. And like I said, I'm confident that we are going to find the right balance."

(ABC News)Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build "the premiere corporate aircraft hangar on the eastern seaboard" to house them, ABC News has learned.

The financial giant's upgrade includes nearly $120 million for two Gulfstream 650 planes and $18 million for a lavish renovation of a hangar at the Westchester Airport outside New York City.

The Gulfstream 650's are described by the manufacturer as the "fastest," "widest" and "most comfortable" private jet ever with superior cabin amenities, an optional stateroom, and 12 interior designs to choose from.

"It's a remarkably boneheaded decision," said corporate watchdog Nell Minow, the editor and founder of The Corporate Library, a group that provides independent corporate governance research and analysis. "It's completely tone deaf."

TARP-funded corporations have been harshly criticized recently for continued use of luxury perks and corporate waste. President Obama has voiced his outrage, introducing regulations on executive compensation and on the disclosure of money spent on such perks. After pressure from his administration, Citigroup abandoned plans for a new $50 million corporate jet from France. And in February, Obama said the days of bank executives flying corporate jets "were over."

But on March 11, the chairman of JPMorgan Chase, Jamie Dimon, said he could not understand why corporate America has such a bad image.

"When I hear the constant vilification of corporate America I personally don't understand it," Dimon said.

Dimon, whose 2008 compensation package, according to SEC documents, was worth more than $19 million in salary, stock and options, declined to speak with ABC News about the proposed plans.

(Business Week) Edward M. Liddy, the would-be rescuer of American International Group (AIG) who has become a target of wrath over Wall Street excesses and the ravages of the recession, knows all too well what is driving that anger. "There's fear in America," says Liddy, who came out of retirement last September to run AIG for the government for $1 a year. "People are very concerned about their jobs, their homes, their pensions."

And Liddy, who is no fan of the multimillion-dollar bonuses agreed to by his predecessors at AIG even while he tolerates them, knows very personally what such fear and want mean. Liddy, who earned more than $130 million over eight years leading Allstate (ALL) until 2007, grew up so poor that he, his mother, and sister were thrown out of their homes at times after his father died when he was 12. There were days, he says, when food was short in his native New Brunswick, N.J. "We'd have dinner for three and food for two and my mother would say, 'I don't feel well right now. You two go ahead,' recalls Liddy, now 63. "You can believe I know the angst of the American taxpayer and what's happening in economically uncertain times."

But rage and fear, he says, should not blind people to the best way out of the AIG mess. In an exclusive interview with BusinessWeek, the reluctant AIG chief says he and others at the company want only to pay off the $80 billion that the government has poured into the company so far and help it make money on another $50 billion in investments the government has made in AIG-related operations.

The approaches AIG management is taking, even if they seem to only ramp up the furor, should do just that over time, he says. And Liddy says they should also leave surviving companies that will be able to keep many of AIG's 116,000 global workers employed and its policyholders protected.

Making that case has been enormously difficult for Liddy, a tough-minded executive whose professional climb has been a modern Horatio Alger tale. He worked his way through Catholic University and launched his career at Ford (F) after collecting an MBA at George Washington University. He worked at pharmaceutical company G.D. Searle & Co. and later helped take Allstate out from under Sears, Roebuck and Co. He then led Allstate.

Liddy's tenure at AIG, since taking the helm at the request of former Treasury Secretary Hank Paulson, has been marked by public relations disasters that he didn't create. Only a few days after the federal government launched the bailout of AIG last September, top executives—not including Liddy—wined and dined independent agents at a posh California resort for a week, costing some $443,000. In more recent days, of course, disclosures about some $165 million in retention bonuses have drawn the ire of no less than President Barack Obama.

Liddy himself was skewered over the bonuses this week in a daylong hearing in which he was grilled by a couple dozen congresspeople. One, reflecting the public outcry, says AIG nowadays stands for "arrogance, incompetence, and greed." Says the chronically understated Liddy, "It was a very uncomfortable experience."

Many critics have said the brouhaha over bonuses and marketing meetings also reflects populist rage against Wall Street, anger at how the pinstriped set seems to be making out lavishly at public expense in a game that's rigged against the public. But, as Liddy sees it, it also reflects the huge cultural gap between doing business in the private sector and doing it publicly and in ways answerable to politicians and bureaucrats.

Take the marketing meetings. Such meetings, he says, are the way business is done in the insurance world. Companies such as AIG want independent agents to pitch their policies and other products instead of those of rivals, and bringing those agents to resorts to both school them in the products and reward them for selling them is just ordinary business practice. "Do you hold them in nice places? Yes, because you want people to come," he says. While they are there, he adds, the agents get hefty doses of education in so-called suitability, so they don't wind up selling risky long-term products—say variable annuities—to 85-year-old widows.

As for the bonuses, Liddy would have handled them differently. He says he would have offered less generous payments, made them contingent on performance, and included a "clawback" provision to take the money back if people left. But he says he inherited the contracts for the bonuses from his predecessors who arranged them as long ago as late 2007 and early 2008. He says he feels bound to honor the contracts, arguing that in insurance, in particular, a company is only as good as its ability to keep its promises.

He adds that the staffers who have collected the bonuses—more properly called retention payments—are needed, too, to wind down some $1.6 trillion worth of complex derivatives contracts so the company can exit that business without facing multimillion-dollar losses.

This, too, reflects the gap between Wall Street and Main Street, he suggests. On Wall Street, multimillion-dollar bonuses are the way people get paid, as they handle business that can cost a company far more if a trade is mismanaged. The people handling the derivatives contracts—whom he pointedly says are not the ones who got the company in trouble over them last fall, since those folks have been canned—have so far managed that business down from $2.7 trillion at the end of December.

"Those people don't want to work for free," he says. They must be paid well, he says, to stay on—especially since they are managing themselves out of work, in effect. The amount of money AIG can lose if they walk or people unfamiliar with the business take over is just too great, he argues. "You can lose 10 times the $165 million in a day on a bad trade, and that's just not a good risk in our judgment," he says.

Liddy's game plan to restructure AIG also has run into disastrously bad timing. He has refused to sell a well-regarded Asian subsidiary, AIA, for lowball offers. Though some critics argue that the attempt to sell the unit came too late and involved giving far too little information to prospective buyers, he insists there was plenty of detail and ample time. He himself tried to pitch it to Chinese investors, though they were scared off by the market meltdown in the U.S. The problem, he says, is that would-be buyers—big insurance companies, mainly—have seen a huge slide in their stocks, so they don't have the up to $25 billion to do a deal for the company.

Liddy is now planning to put AIA and another big subsidiary, Alico, into a trust and turn that over to the Federal Reserve. The move would take the units off AIG's balance sheet—though AIG would continue to run the companies—and reduce or eliminate AIG's debt to the Fed. Eventually, he says, the Fed could sell the trust or spin off the companies in a public offering. As for the rest of AIG, he expects to change the names of its many insurance companies and perhaps the parent, since the AIG name is so tarnished that customers might balk at it.

Liddy expects that the turnaround of AIG will take several years. Given what he has had to endure, he says he may not be around in the top job to finish the task. But he insists he will stay, despite all the grief and occasional threats he gets, until he positions the company on the road to recovery. "This is not a life job for me," he says, adding he'd much rather be promoting Chicago for the Olympics, helping hospitals back in the Chicago area, and enjoying his family. "I want to get it moving in the right direction."

The CEO took the position because former Treasury Secretary Paulson, a longtime friend, asked him to. He says he felt a need to give back to the country, since it has taken him from rags to riches. Pulling AIG out of trouble would be something good, he insists, for the nation. "The country needs a victory," he says.

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