Harold BradleyWay to go President Obama! It’s about time that somebody took on the job of shareholders and boards of directors in calling out Wall Street’s leisure class. The posturing and threats that compensation reform will ruin the economic system that formerly was the “envy of the world” today met a stiff right hook.
It reminds me of the famous welterweight boxing matches in the 1980s between champion Sugar Ray Leonard and an equally famous fighter Roberto Duran, known as the one with “hands of stone.”
Sports historians recount a story about how in the days before the fight Duran insulted Leonard at every opportunity, even walking up to Leonard and his wife on a public street and threatening them both. Duran was described in various reports as crude, thuggish, macho and arrogant. He baited the boxer Leonard into a slugging match and Leonard lost.
Call that TARP I. As the pundits yelled “the sky is falling,” Timothy Geithner, New York Fed President, and Henry Paulson, Treasury Secretary, caved to Wall Street’s legitimate panic and stocked the vaults full of our tax dollars. Then the executives quickly doled out billions in year-end bonuses so the talent “wouldn’t walk out the door.”
To where? These folks are the highest paid people in the history of the world. The only jobs I can think of that pay more on average are openings for dominant left-handed starting pitchers in the big leagues, or maybe Manny Ramirez, to mix my sports’ analogies.
Five months after Leonard lost, they fought the second fight. Leonard learned his hard lessons and danced around Duran in fight two until Duran threw up his hands and grunted the famous words: “No Mas.” He wanted out. He couldn’t hit Leonard. He was out of gas.
Today, President Obama dictated terms long overdue and I’m a BIG free market guy who would normally object to such government intrusions. He said: No more than $500,000 in cash, Mr. Wall Street executive. Oh the wailing and gnashing of teeth. That’s all I heard all day until I read the actual terms.
These execs can earn more compensation than the cash amount – but in restricted stock they earn at each firm that can’t be sold until after the government is repaid for its current role as the largest shareholder in a number of these distressed companies.
The executives’ restricted stock won’t vest for three years. As the largest common stock shareholder, it is the government’s right to dictate pay. The money magicians and their boards relinquished a say in pay when they levered up 30 times. I just don’t understand why the terms are not retroactive to TARP I and I really hope that executives can’t otherwise monetize these grants through the use of options, swaps or other derivative instruments until we, the owners of the companies, are repaid.
When I first started in the business in the late 80s, the average Wall Street firm is said to have paid out about 25% of revenues in salary and bonuses to the traders, the investment bankers and the investment analysts (who, says the data, are far worse at their jobs than the local weatherman).
That last sentence really isn’t fair. The weathermen have more demonstrated success. Last year, several of the sick firms paid out more than 70% of revenues for the “talent.” Say what? That’s a percent of revenues and not profits. Where were the boards of directors?
Behavioral finance folks talk about the bad tendency for human beings to anchor. Investment bank boards all look at compensation surveys from firms like McLagan Associates that create wonderful behavioral anchors. As soon as one (generally weak) bank begins to pay more for talent, competing executives worriedly tell boards that they are falling behind peers in pay. The best of the players will walk, hears the board. And the average firm’s compensation escalates quickly to match or exceed the others in Lake Wobegone.
On Wall Street, no banker is just average. In fact, I’m sure some boards heard dire predictions that Goldman would poach ALL the players on Wall Street if their firm didn't keep up in pay.
The real tragedy in all this is that investment banks once were partnerships. Partnerships paid maintenance salaries during the year and then divided the spoils among the most productive partners at year-end. Partnerships were ruthlessly efficient at weeding out underperformers and at not doing stupid things. The decisions they made affected their money and livelihoods.
Some time in the last 20 years, Wall Street realized they could do the Marie Antoinette thing by going public and letting public shareholders “eat cake,” or what little was left after the bankers gorged their “share.” Where was the corporate governance in all this? I’ve seen very little media attention directed to this question. My take is that these guys act like they still own the joint when they sold it to us and our 401(k) accounts years ago.
Mr. Obama today reminded me of the great Austrian economist Joseph Schumpeter who is best known for coining the phrase “creative destruction.” The move today seems calculated to force Wall Street to seek a smaller and less systemically threatening form. It may take years for some of these former titans to pay back the taxpayers. The restricted stock will be a long, long dated call on success.
Many talented executives will likely seek other industries or smaller, more nimble competitors in finance, but probably not today. There aren’t any jobs. When the folks who established the top prices can no longer afford to pay such fare, then gravity will do its work. Big firms can’t grow very fast, especially out from under a mountain of debt. Smart folks who can no longer hitch a ride on the gravy train will seek opportunities in smaller, faster growing organizations. Smaller firms pose less risk to our financial system over time.
These guys have been telling us for a long time that our economic system is the envy of the world. Today, Mr. Obama took a big step in reclaiming that title. The masters of the universe are gasping "No Mas" with this new reasoned response to an industry grown "too big to fail."
Of course, I always want to go one step further. If we want to help U.S. citizens retire without government help, we should eliminate the tax on dividends and encourage policies that make sure that dividends constitute the bulk of executive pay. Stocks don’t make sense if only company employees succeed. If dividends made more sense from a tax policy perspective, then investors would get paid side by side with executives for the capital they risk to help American businesses grow and prosper. Of course, this is fodder for another day’s blog.
Harold S. Bradley
CIO, the Kauffman Foundation
So, how much of this came true..some but not much..will have to see what the 2nd year will bring.Car Wraps | Used dump trailers