Last Tuesday, a New York Times reporter found power suits celebrating at an outdoor café outside the headquarters of Wall Street banking giant Goldman Sachs. The cause for celebration? The Treasury Department had just agreed to let ten big banks repay their taxpayer bailouts.

Why celebrate that repayment? None of these ten big banks now have to abide by the executive pay limits the White House and Congress stuck on the bailout.

All those smiling faces must have warmed the heart of Treasury Secretary Timothy Geithner. On Wednesday he did his best to spread the good cheer. In a bravura display of political sleight-of-hand, Geithner turned the specific bailout limits announced and legislated in February into mushy pay prescriptions that make all Wall Street once again safe for business — and windfalls — as usual.

In this week’s Too Much, we have more on Geithner’s magic touch.

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Let’s see, who should chair the board of the new General Motors, now that taxpayers run the show? How about a CEO who retired two years ago — with a $158 million retirement package — after engineering a merger that cost 25,000 workers their jobs? Meet Edward Whitacre Jr., the former chief exec at AT&T. Treasury Department officials and GM have agreed to have Whitacre take over as GM’s chair as soon as the automaker exits from bankruptcy. In 2006, the year after the merger of AT&T and SBC Communications that climaxed Whitacre’s career, the long-time telecom exec took home $61 million. Whitacre has no auto industry experience. He does drive a Chevy Suburban . . .

Mark Thomas, the British comic who delights in popping the pretensions of the super rich, has begun a new national tour that one reviewer is calling “half comedic gig, half think tank.” At each performance, Thomas and his audience explore policy ideas that somewhat stretch the boundaries of mainstream political discourse. Last week, Thomas riffed on the notion of establishing a maximum wage and invading Jersey, the tax haven isle off the coast of Normandy, to “reclaim stolen tax revenues.” Just over a decade ago, on his TV show, Thomas exposed how wealthy British families were avoiding inheritance tax by making their historic homes officially “available” for public viewing, then hiding information about the availability from the public. Parliament changed the law to kill the scam the next year . . .

The CEO of one of the world’s top oil companies, Royal Dutch Shell, has just realized he’s making too much money — and he’s calling for real reform in executive pay. Shell chief exec Jeroen van der Veer took home $14.4 million last year, a substantial boost over his $9.1 million take-home in 2007. But van der Ver is retiring later this month, and he’s apparently feeling reflective. Last week, in a Financial Times interview, van der Ver acknowledged that pay at his level has precious little impact on performance. Explained the 61-year-old: “You have to realize: If I had been paid 50 percent more, I would not have done it better. If I had been paid 50 percent less, then I would not have done it worse.” Added van der Ver in another interview, with a Dutch paper: “If the whole of society in its generality thinks that the remuneration model is a problem, that does mean that you have to change.”

The editor of the Robb Report, the world’s premiere magazine for the luxury consumer, is standing up for his people. In last month’s Robb Report, editor Brett Andersen blasted the rest of the media’s “pernicious prejudice” against the wealthy. In the new June issue, he’s attacking the media’s growing “demonization of the wealthy and the industries that cater to them.” To bolster his case, Andersen invited the top execs at six prestigious luxury brands “to share with our readers their thoughts on the role luxury plays in these turbulent times.” The most enthusiastic of his contributors: Margareth Henriquez of Krug, maker of the world’s most expensive champagne. Effused the vintner: “Luxury companies have lighted the way for the rest of the world.”

In Southern California, the Los Angeles Times reports, the top luxury design showrooms are now lighting the way with “light fixtures made from old French apple baskets” that “carry $1,600 price tags.” The fixtures go just perfectly with tables “made from wine barrels and reclaimed stove tops” that start at $1,240. The former curator of design at L.A.’s Museum of Contemporary Art is calling this hot new look “dumpster diver deluxe.” What’s the attraction of a $3,000 sofa sectional “upholstered in material from old pup tents”? The wealthy, says the National Design Museum’s Matilda McQuaid, “are trying to play the role of an 'impoverished man,' but in a very safe way.”

Quote of the Week

“Probably the only large group of workers for whom bonuses directly impact their behavior are those who get a direct slice of the profits and can make bigger profits from taking bigger risks. They are called bankers, and we all know where that's got us.”
Julia Finch, Bonus scam admitted at last. Guardian, June 9, 2009

New Wisdom
on Wealth

Michael Sean Winters, Changing the Culture of Greed, America magazine, June 11, 2009. Higher taxes on the rich, this religious journal argues, would help discourage avarice.

Lucian Bebchuk and Holger Spamann, Regulating Bankers' Pay, Harvard Law and Economics Discussion Paper No. 641. Why regulating banker executive compensation might discourage reckless bank behavior better than traditional bank regulation.

Kathy Kristof, Blame high executive pay on corporate boards, Los Angeles Times, June 14, 2009. Average shareholders speak about the price we pay, as a society, when we wink at excessive executive rewards.

Making Wall Street Safe Again for Windfalls

Early this past February, amid escalating public fury over $165 million in bonuses at bailed-out insurance giant AIG, President Obama announced a $500,000 cap on executive cash compensation at bailed-out firms getting “exceptional assistance.”

Congress, feeling that same fury, would soon toughen limits on executive pay even more. Lawmakers banned executives — at any firm in TARP, the showcase bailout initiative  — from taking in bonus dollars that equaled more than a third of their total compensation.

And then executive pay proceeded to drop off the political radar screen — until last week when Treasury Secretary Timothy Geithner unveiled the long-awaited new rules meant to clarify just how much executives can make when tax dollars are keeping their companies afloat.

Secretary Geithner’s answer: They can make plenty.

“We are not capping pay,” the secretary told reporters Wednesday.

Geithner’s new directives essentially erase the executive pay cap President Obama announced in February. Geithner's new rules, in effect, turn that $500,000 maximum into a minimum.

Under these rules, a new federal pay czar will “automatically approve” any pay package the nation’s most troubled enterprises dish out that doesn’t top half a million.

How high above this half million can these pay packages now go? The original White House $500,000 cap on cash compensation did allow execs to collect additional stock awards, on an unlimited basis, so long as they didn’t cash those awards out until their firms had paid back their bailouts.

But the bonus restriction that Congress then passed — limiting bonuses to one-third of total pay — effectively placed a lid on these additional awards at $250,000, a figure that would translate into one-third of total pay if cash compensation were limited to $500,000.

The new regs Geithner released last week knock this lid off. They turn full responsibility for executive pay at firms now getting “exceptional assistance” — a group that now includes AIG, Citigroup, Bank of America, Chrysler, GM, GMAC, and Chrysler Financial — over to a new pay czar, Washington superlawyer Kenneth Feinberg.

Feinberg, for his part, spent last week reassuring Wall Street how reasonable his pay judgments will be. He even urged reporters not to call him a “czar.”

“It makes it sound as if my goal is to impose certain restrictions on the private marketplace,” Feinberg explained, “whereas I am much more interested in working with these companies.”

And those companies seem eager to work with him. Top corporate execs, the Washington Post reports, “breathed a sigh of relief” Thursday after going over the details in the Geithner pay package. They found little reason, as one top New York executive compensation consultant told a Bloomberg reporter, “to be prepared for less pay.”

The new Geithner executive comp package has something for everyone.

The biggest bailout basket cases now have no pay cap and more wiggle room. The pay czar will be reviewing and approving their proposed executive pay levels under “principles” that allow the basket cases to argue that they need to pay princely sums to remain competitive.

Beyond the basket cases, in the much larger universe of TARP recipients, the Treasury Department has thoughtfully excluded a variety of financial industry revenue streams from regulation. Investment managers who get to pocket a percentage of the assets they manage, for instance, don’t have to worry about any bonus limits kicking in, no matter how grand the assets grow.

TARP recipients do face some new rules that prohibit some commonplace executive pocket-stuffing practices. One example: Firms can no longer reimburse their executives for the taxes the execs owe on their perks like free country club memberships, a practice known as “grossing up.”

But TARP recipients can increase regular executive cash compensation to offset the shortfalls these new prohibitions create, and the higher this cash compensation goes, the more firms can shell out in bonuses and still meet the bonus-as-one-third-of-total-pay limit that Congress set.

And the big banks that have paid off their TARP dollars? These kingpins — the likes of Goldman Sachs, JPMorgan Chase, and Morgan Stanley  — get the best deal at all. They face no compensation limits whatsoever.

Yet these financial giants are still receiving government aid, most notably via FDIC loan guarantees. These guarantees have enabled the ten banks that exited TARP last week to borrow $57.8 billion at lower-than-market interest rates. These interest rate savings, in turn, are pumping up the banks’ bottom lines — and the “performance” bonuses due their heaviest of hitters.

“Our financial system,” Secretary Geithner noted last week, “is built on trust and confidence.”

The superstars of that system, now more than ever, have every reason to confidently trust in Secretary Geithner.

No Wizards Behind This Curtain

Annalisa Barrett, Paul Hodgson et al, What Is the Impact of Private Equity Buyout Fund Ownership on IPO Companies’ Corporate Governance? The Corporate Library, June 2009.

Virtually all the CEO pay statistics that grace the pages of our business press come from companies that trade their stock on Wall Street. That's because federal regulatory mandates require publicly traded companies to disclose basic information about their business practices, including how much they pay their top executives.

Privately held companies don’t face these same regulations. They don’t have to reveal information about how they go about their business. And they don’t have to deal with pleasing the shareholding general public.

These realities, the movers and shakers of the “private equity” world like to assert, make privately held companies inherently more efficient than their publicly traded counterparts. Privately held companies, the claim goes, have a small number of owners who, because they directly own the show, have the motivation to really make sure the company is running on all cylinders.

Our contemporary high-finance landscape now sports a category of enterprise — the private equity firm — that specializes in translating this claim into highly lucrative investment opportunities. Private equity firms raise money from deep-pocket investors and leverage this pool of cash to buy out publicly traded companies they see as inefficiently managed.

The private equity firms then yank their newly acquired companies off the public stock exchanges and “fix” them, often by squeezing workers and selling off subsidiaries. Job complete, they bring their restructured companies back to Wall Street for a stock sale to the general public — at what they figure will be a much higher share price than they originally paid.

In 2000, buyouts of publicly traded companies by private equity high-finance whizzes constituted just 4 percent of global merger-and-acquisition volume. By 2007, transactions that took public companies private made up 20 percent of global wheeling and dealing in corporations.

So did all this taking companies private end up making lots of enterprises more efficient and better run? Or did all this activity just make oodles of money for the wheelers and dealers?

The sober authors of this new report from the Corporate Library have some answers. They've conducted a detailed analysis of companies brought to Wall Street for stock offerings, both companies that had been run by private equity buyout firms and those that had not. The goal: to see which companies had adopted practices that make for good corporate governance and which hadn’t.

Focusing on stock offering situations enabled the researchers to get a rare peep behind the private equity curtain — since companies that private equity firms take back to Wall Street have to reveal information about their basic operations before they can offer shares of stock to the general public.

That peep proved productive. The data they uncovered, the researchers note in their analysis, do “not support the private equity claim to superior corporate governance.” Companies taken public by private equity firms, they add, “exhibit, in a higher proportion than average, a number of features that have the potential to benefit executives at the expense of shareholders.”

Core executive salaries at private equity-backed companies, the study goes on to point out, “far exceed those of CEOs” at companies without private equity firms in the picture. Median total compensation actually runs two and a half times higher at the private equity-backed enterprises.

Remember all that the next time you see an executive pay survey in USA Today or the Wall Street Journal. Those surveys don't include any data from outfits the private equity firms run. If they did, we'd all be even more aghast.

Stat of the Week

U.S. corporations spent more subsidizing personal private jet rides for their executives in 2008 than the year before, say researchers at Equilar, a compensation consultancy. The value of the free rides for execs jumped 29 percent, to a $141,477 average.

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.