Executive Compensation Caps

While announcing his policy to cap the salaries of executives in the companies that receive federal bailout funds, President Obama declared the same disgust that I have for the activities of the "bad guys" that I mentioned in my Tuesday posting. Thank you, President Obama, for acknowledging the need to prevent the misdeeds of the "bad guys."

The ultra-right-wing critics are screaming, "socialism," of course. But they need to understand that if you live in your parents house, and accept an allowance from them, you must obey their rules. People involved in education and health care have known this for years. When schools accept money from the Government, they can expect that the Government will place constraints on the content of their courses and on school activities. If you don't want Government control, don't accept Government money.

Rightfully, the cap policy extends only to a few very high-paid executives of some large corporations, the greediest offenders. CEO's of many small banks and companies will not be impacted, nor should they be. As much as I would like to "nail" the specific "bad guys" I mentioned in Tuesday's post, I understand that legal complications make a retroactive order impractical.

But I am not sure the order reaches far enough. Many brokers and salesmen who get absurdly high salaries and bonuses are not included in the order. Bonuses and golden parachutes are not just received by executives; they are also distributed by executives, often to people who are equally incompetent or equally guilty of shoddy practices. And nothing is done to prohibit luxurious office remodeling and other gifts such as "retreats" at luxurious resorts.

It appears that President Obama has a reasonably good understanding of the current financial problems and their solutions. He has established a policy to curb executive greed. Unfortunately the policy seems more symbolic than effective.

The president also needs to be more active in steering Congress toward a truly effective stimulus bill, as opposed to the current collage of government spending on programs and activities that do little to create jobs for people.

Merely pumping money into our economy will not resolve our financial problems. We must implement projects that create many jobs for workers in many disciplines. We must aggressively act to eliminate the greedy, selfish, and foolish practices that created the problems in the first place.

The sources of the financial mess are bi-partisan. One party encouraged the use of unsound credit practices in order to allow people who could not afford homes to purchase them. The other party insisted on less and less regulation and oversight of financial activity. One party insisted on spending more and more money of federal give-away programs and pork-barrel projects. The other implemented tax cuts, loopholes, and tax-dodges for the greedy billionaires.

So the solutions to the problem must also be bi-partisan. The time has come for members of Congress to stop blaming each other and to accept ownership of both the problems and the solutions. The current Democratic Party leadership in Congress appears both unable and unwilling to do that.

Who Are the Bad Guys?

Like just about everyone, I have been watching the value of my house and my IRA decline over the last year.

Someone once told me we should try to fix the problem, not the blame. But to fix the financial mess we are in, fixing the blame is essential. That's because problem was caused by people acting irresponsibly, and we must identify the people and stop their greedy and irresponsible actions.

So who are the bad guys? They are in two groups of people that I have criticized before:

The first are corporate executives who not only take obscenely large salary and benefit packages, but also accept gigantic bonuses and/or separation packages even after their poor decisions have driven their company into the ground. In addition, they pay out large bonuses to second- and third-tier executives even when their actions fail to improve the company's financial position. They attempt to justify these bonuses by saying they need to pay them in order to keep good employees from leaving the company. If these employees are so great and so worth keeping, why have they driven the company down the drain? Some companies even used Federal bailout funds to pay the bonuses. The Orange County Register of Sunday, Feb. 1, names some of the specific bad guys:

• Ameriquest--Roland Arnall and Dawn Arnall, whose net worth was estimated at $1.5 billion in the year their company closed. Lee was paid $34 million as a consultant. A federal lawsuit brought by a group of borrowers argues the Arnalls paid Lee "hush money" to keep their predatory lending secret.
• Countrywide Financial--Angelo Mozilo, who sold off $478 million in shares while his company fell into the position where it had to be sold, then walked away with a gigantic separation package.
• Lehman Brothers--Richard Fuld acceped $40 million in compensation in 2007. He recently transferred his $13.3 million Florida home to his wife for $100.00.
• Washington Mutual--Kerry Killinger accepted $46 million in compensation from 2005 to 2007 while he lowered WaMu's underwriting standards.
• Merrill Lynch--John Thain spent $1.2 million to redecorate his office last year, and doled out $4 billion in 2008 bonuses after the investment house lost $15.3 billion.
• New Century Financial--Robert Cole, Ed Gotschall, Brad Morrice took $58 million in stock profits, dividends and bonuses in 2005 and 2006 as the company headed for collapse in 2007.

A second category, related in some ways to the first, is people who identify their profession as "investor." An investor buys shares in an enterprise in hopes of sharing the the profits from its success. There is nothing wrong with investing--it's the core of the capitalist system. In fact, if we are all smart, we make investments in addition to doing our "real job." But some investors have no "real job." They buy one stock and sell another, based on projections from analyists, newspaper articles, and plain old rumors. Their entire "work day" is spent pushing paper, gambling on the success of one business or the failure of another. That's what they really are: professional gamblers. They do not make a product or provide an essential service. They invest their money in a company, but not their time, work, or wisdom. They do not contribute to a company's success. If a company they have invested in runs into hard times, they do not try to help it succeed, they just sell their stock and buy a more promising one. Even today while the rest of us work, these professional "investors" are responding to rumors and driving the stock market further down with their continuing gambles.

The goal of the bad guys is not to help companies be successful, but rather to get as rich as they can.

Some people have already identified a few of the bad guys. Federal and state attorneys have begun investigations. Shareholders and borrowers have initiated lawsuits. But the bad guys are devious, and not dumb. They will rationalize, duck, and weave. The process of nailing them will be long, costly and inefficient.

We need to identify the bad guys and pursue them zealously. We need to punish the greedy, the incompetent, the gamblers, and the thieves. We need to regulate their successors so that the errors and the crimes will not be repeated. And we need to stop rewarding people who do poor work, or no work at all.