WAHOPO: Capitalism's Enemies Within

[El Pinko]

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/22/AR2008012202615.html?hpid%3Dopinionsbox1&sub=AR

Capitalism's Enemies Within

By Robert J. Samuelson
Wednesday, January 23, 2008; Page A19

Amid the mayhem on world financial markets, it is becoming clear that capitalism's most dangerous enemies are capitalists. No one can have watched the "subprime mortgage" debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs -- and they left with multimillion-dollar pay packages. Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It's not as if these CEOs weren't compensated in all those years. If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy.

Wall Street's pay practices perversely encourage extreme risk-taking that can destabilize the economy. Subprime mortgage losses may simply be chapter one. Now there are signs of problems involving securities known as "credit default swaps." Never mind the details. Concentrate on the possible fallout. If banks and investment houses sustain more losses, the nation's credit system will be further wounded and so will the economy. The Federal Reserve cut its key overnight interest rate yesterday from 4.25 percent to 3.5 percent -- a huge move -- in part to shore up this wobbly credit system.

By "Wall Street," I mean all the commercial banks, investment banks, mutual funds, hedge funds and the like that comprise the financial sector -- but particularly investment banks. Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. But pay is also heavily skewed toward annual "bonuses" based on the profits that traders and bankers generate. I asked Johnson Associates, a compensation consulting firm, for typical Wall Street pay packages. The results describe "managing directors" based in New York with 10 or 15 years experience. Most would be in their 40s.

[Faux pas]

1. Great find, thanks! And welcome to DU El Pinko!

:hi:

[El Pinko]

4. Thanks!

[ursi]

2. disgusting!

[salin]

3. k &r

I don't have time to read the whole article right now - will come back to read it (and comments) tonight when I get back from work.

[The Backlash Cometh]

5. We're being destabilized by reckless risk takers.

[gratuitous]

6. Samuelson gets it right about once a decade

And, it seems, on the subject of executive compensation. He had a terrific column during the 1990s about executive compensation with a list of questions that every board of directors should ask of their CEO. One was where else could you get this kind of compensation, what other company would pay you what we're paying you? Another, who is your successor? Who is being groomed to replace you, and could that person take over tomorrow if you keel over from a heart attack? If not, why not? It was an excellent series of really tough questions that someone receiving multimillions should have a ready answer for.

This is another good column, and Samuelson ends by noting one very basic component of unbridled greed: Why should one person or company practice economic self-discipline when other companies are turning big earnings and making heueueuge salaries by cutting corners, taking shortcuts and following bad practices? But Samuelson fails to come up with a solution of any kind for this, because it's anathema to capitalism run amok, and that is strong, effective regulation by an impartial outside agency (read: government).