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June 8, 2009 |
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One of the world’s more contemplative wealthy people, billionaire bond trader Bill Gross, had some interesting things to say last week. Gross, you may remember, two years ago predicted big trouble ahead if inequality in America continued escalating. “When the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water,” Gross wrote in 2007, “then the system ultimately breaks down.” What’s Gross saying now? “Over the next several decades,” he told investors last week, “the ability to make a fortune by using other people’s money will be a lot harder.” Gross might prove to be right — if lawmakers ever start legislating reforms as bold as the proposals for busting maldistribution that surfaced last week in Australia and Britain. Be bold. Read this week’s Too Much and find out more. |
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Santa Clara, the unofficial capital of California’s Silicon Valley, may soon sport some football amid the semiconductors. The Santa Clara City Council voted last week to build a new stadium for pro football's San Francisco 49ers. The stadium will cost taxpayers $79 million, but only if the deal wins a voter thumbs-up in a referendum now slated for next spring. The 49ers started courting Santa Clara after San Francisco mayor Gavin Newsom refused to spend $60 million to repair the team’s current facility. Shelling out those millions, the mayor reiterated Tuesday, would be “subsidizing very wealthy people.” Added Newsom: “I'm trying to make sure public housing residents have adequate heating this year. I'm less worried about billionaires getting their stadium.” Ben Stiller. Michael Jordan. Smokey Robinson and the Miracles. Miley “Hannah Montana” Cyrus. They all put in star turns last week at Wal-Mart’s annual shareholders meeting in Fayetteville, Arkansas. They all must also have cost a pretty penny. But, hey, Wal-Mart’s top brass felt like celebrating — and for good reason. In fiscal 2009, the year that ended this past January 31, Wal-Mart’s top five executives together pulled in over $70 million. Their $14 million average amounted to 622 times the annual take-home at Wal-Mart’s $10.83 average full-timer hourly wage. Crowed the Wal-Mart vice chairman at Friday’s annual meeting: “Winning feels good, doesn't it?”
The tales of greed at AIG, the bailed-out insurance giant, just keep coming. The latest revolves around a stock slush fund former AIG chief “Hank” Greenberg set up back in the 1970s to reward his executives “off the books.” Greenberg — a long-time fixture on the Forbes 400 list of America’s richest — ran AIG until four years ago when company directors, after an accounting scandal, opted to give him the heave-ho. But the slush fund stayed under Greenberg’s control, and now AIG is asking the courts to transfer that control to “a reliable trustee who will put the shares to work for AIG and American taxpayers.” To stop that shift, Greenberg is claiming that the slush fund — still worth half a billion dollars, even after AIG's slide — has become a charity. But the fund, AIG spokesman Mark Herr retorted last week, only began to “show charitable tendencies” after AIG brought suit against Greenberg . . . The Obama administration will this week reportedly release specific regulations for executive pay at enterprises collecting bailout dollars. Also set to be announced: a new Treasury Department “pay czar” who’ll help bailed-out companies calculate exactly how much executive pay they can legitimately shell out. The front-runner for the czar slot: Kenneth Feinberg, the ex-Ted Kennedy aide who ran the federal compensation program for 9/11 victims. Former Clinton White House attorney Lanny Davis, a Feinberg friend, doesn’t expect his buddy to rile many Wall Street feathers. Explained Davis last week to the Wall Street Journal: “He is perfect person to make the ‘man bites dog’ case that executives should be paid more to get these banks out of trouble and make sure the taxpayers’ money is not squandered. It’s like Nixon going to China.” |
Quote of the Week “The question of the indispensability of the CEO is one that has occupied business scholars for 70 years. And while the debate is far from settled, many of the most prominent and widely cited business-school professors and other experts believe that the American obsession with who sits at the top of the organizational chart has gone much too far.”
New Wisdom Lawrence Wright, Slim’s Time, The New Yorker, June 1, 2009. A profile of Carlos Slim, the Mexican billionaire who made his fortune the old-fashoned way. He put his “money on a monopoly.” David Zirin, How I Learned to Stop Worrying and Love the Lakers, The Nation, June 6, 2009. Why basketball fans everywhere ought to be rooting against billionaire Orlando Magic owner Richard DeVos.
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A New Drumbeat for a 'Maximum Wage' You don’t need to be particularly bold, not these days, to blame excessive executive compensation for a good chunk of what ails the world economy. Over recent months, a wide array of public figures — from government and business to academia and the press — have been doing just that. The latest observer to underscore the dangers excessive executive rewards inevitably create: Jeff Lawrence, a top-ranking leader in Australia’s national labor federation. “Outrageous executive salaries and bonuses,” Lawrence noted last week at the Australian Council of Trade Unions triennial congress, have “encouraged a culture of excessive risk-taking and short-term thinking that is widely acknowledged as a major cause of the global financial crisis.” “Year after year of virtually unlimited increases in CEO pay packets,” Lawrence would go on to add, have left executive remuneration “out of all proportion with the work performed.” Nothing exceptionally bold in that observation. But you do have to be somewhat daring to propose what Lawrence — on behalf of Australia’s labor movement — proceeded to say next. The union leader called on Australian federal officials to cap corporate executive pay at ten times an enterprise’s average worker wage. What about executive bonuses? The Australian labor movement wants “performance” incentives strictly regulated — and limited to situations where companies out-perform their peers over a full five-year span. How boldly, comparatively speaking, does this Australian pay cap push stack up against executive compensation reform efforts in other nations? In the United States, lawmakers are still struggling to get shareholders the right to take mere advisory votes on executive pay. In 2007, chief executive compensation at America’s top 500 companies averaged 344 times average worker take-home. In Australia, the latest stats put the CEO-average worker pay gap at 63 times, up from just 18 times in 1990. That’s enough to outrage Down Under labor leaders. “Corporate Australia has lost its moral compass,” Australian Council of Trade Unions president Sharan Burrow charged at last week’s labor congress. “Outrageous multi-million bonuses,” she pointed out in Brisbane, “are still being pocketed by the engineers who created a financial house of cards that toppled over and is now destroying the livelihoods and the homes of millions.” The ACTU ten-times cap proposal figures to get a hearing. Australian Prime Minister Kevin Rudd, this past March, asked the national blue-ribbon Productivity Commission to weigh in on the overall executive pay question. He directed the panel to “examine all workable options” for ensuring that executive pay packages “do not reward excessive risk taking or promote corporate greed.” The commission will likely report out recommendations this December. Meanwhile, in Britain, nine members of Parliament have just introduced legislation to place “a cap on the maximum wage that can be paid to any person in any one year.” Millions of low-income workers, the measure’s lead sponsor, MP Paddy Tipping, told the House of Commons Wednesday, have benefited from the British minimum wage. “We need to complete the policy circle,” Tipping urged, “and seriously consider the introduction of a maximum wage.” A maximum wage set at ten times the minimum, the former social worker observed, “would give a maximum wage of £120,000,” or close to $200,000. Whatever the specific ratio, Tipping noted, the effect would be profound. “It is clear,” he explained, “that one of the consequences of a maximum wage policy would be that if the top bosses and chief executives wanted to increase their pay, they would have to increase the pay of everyone who worked in the company.” The MPs behind the Tipping proposal are hoping the bill’s introduction will stimulate a broader national debate. “We need to be clear that voters abhor greed and injustice,” Tipping summed up last week in his House of Commons remarks. “There is a crisis in the economic system, and a matching crisis in our political system, and reform is necessary and urgent.” |
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A Sobering Warning We Can 'Trust' Iris Goodwin, How the Rich Stay Rich: Using a Family Trust Company to Secure a Family Fortune. University of Tennessee Legal Studies Research Paper No. 61. April 20, 2009. The political debate over repealing the federal estate tax has been roiling along for nearly two decades now. The debate over the many loopholes that let the super rich sidestep the estate tax has yet to begin. This eye-opening new paper — by University of Tennessee law professor Iris Goodwin — may help to begin it.
Most of us know “entropy,” the notion that ordered systems eventually break down, from high school physics. But the awesomely affluent worry about entropy long past graduation. That’s because grand private fortunes, left to their own devices, dissipate over time. Later generations of wealthy families, as Goodwin relates, become “less wealthy if for no other reason than families grow geometrically and great fortunes fracture into smaller and smaller portions as successive generations become entitled to share the wealth.” Those of us who value democracy can thank our lucky stars for this entropy. Imagine how brittle our democracy would be if wealthy families just kept getting endlessly wealthier, generation after generation. Over the years, as a society, we’ve done our best to help this entropy along. The generation of 1776 struck down the laws that ensured first-born sons their father’s fortunes. More recently, we've levied estate and inheritance taxes.
Until the late 1980s, state legal standards virtually required trust managers to invest conservatively. State laws also limited how long family trusts could last. Sooner or later, every trust had to end, and the wealth in each expiring trust — or what would be left of that wealth after years of inflation and “prudent” investing had eaten it away — would be subject to tax. But new state laws have recast the wealth “preservation” landscape. Many states now allow “perpetual” trusts — and the wealthy need not live in these states to take advantage. With this longer “time horizon” have come changes in standards for “prudent” trust investing. A family trust company can now dabble in venture capital, private equity, or virtually any other high-upside investment. These new standards, Goodwin notes, make it possible “to do with property in trust what has rarely been done before.” Huge fortunes held in trust “can actually appreciate.” Goodwin would like us to appreciate the peril in all this. If we let the mega rich grow ever grander fortunes in unlimited trusts, she warns, the financial entropy that a “thriving democracy” demands “will be a thing of the past.” That's a future we should fear. |
Stat of the Week In 2008, the worst year for the U.S. economy since the Great Depression, pay for CEOs at publicly traded corporations with less than $1 billion in revenue actually rose — by 8.1 percent, researchers at Equilar reported last week. Over three-quarters of the companies in the Equilar survey registered revenues over $100 million. The new figures cover 1,064 CEOs. They averaged $1.3 million. |
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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Americans who want to see somebody go to jail for the recklessness that drove the U.S. economy into the ditch are going to have to wait a bit longer. The Securities and Exchange Commission, the federal watchdog over Wall Street, last week 
Recent changes in state tax law, Goodwin details, are helping America’s super rich conquer “the last frontier in the preservation of great fortunes.” They’ve essentially figured out how to beat “financial entropy and secure a family in its privilege for generations to come.”