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Dec 14, 2009 Too Much Weekly: The Merger Merry-Go-Round

This Week in Too Much

No more Mr. Nice Guy. The financial world’s power suits are pushing back. In the United States and Britain, they’re making threats. Touch our pay, an assortment of high finance higher-ups menacingly muttered last week, and you’ll be sorry.

If this belligerence strikes you as rather bizarre, welcome to the club. Financial sector movers and shakers ought to be smugly content right about now, overjoyed that global political leaders have moved so modestly against their wild chasing after windfalls. Instead, as we report below, they’re talking tough, vowing to take their marbles elsewhere if we displease them.

Let them talk. Let them walk. We don’t need them. The truth is, the work they do seldom adds any value to our economy. The work they do more typically endangers our economic health. We saw that, last year, when trillions in toxic securities turned up worthless and killed jobs by the millions.

The job killing, this year, continues. The murder weapon has simply switched hands, from the clutches of derivative traders to the greedy graspng of the bankers who plot mergers and acquisitions. Their business is booming again. Beware. We have this story, and more, this week in Too Much.

Greed at a Glance

Bob DiamondBankers in London angrily exploded early last week, at the news the UK Labor government was considering a 50 percent tax on banker bonuses. One bank magnate dubbed the bonus tax talk “populist, punitive, and penal.” The boss at Britain’s second-biggest bank added a thinly veiled threat — to lead a financial sector exodus out of London. Noted Bob Diamond of Barclays: “Both financial capital and human capital are extremely mobile.” Would the government, in the face of this bluster, back down? Surprisingly, no. On Thursday, the top UK treasury official, Alistair Darling, announced that all banks in Britain, including local branches of U.S. banking giants, would have to pay a one-time 50 percent tax on any bonus outlays over £25,000, or $40,800. The tax will fall on the banks who hand out the bonuses. Individual bankers will face normal income taxes on their bonus cash. Darling told Parliament he was giving the banks a choice: “They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

A pledge to match the British bonus tax came almost immediately from France, with French President Nicolas Sarkozy calling “the logic” of taxing bonuses “unavoidable.” Elsewhere in Europe, German chancellor Angela Merkel told reporters a bonus tax “would help the financial sector learn from its mistakes.” Out of Washington, meanwhile, came not word one of encouragement. U.S. bailout pay czar Ken Feinberg, for his part, spent last week retreating from the modest pay limits at insurance colossus AIG he announced earlier this fall. The retreat came after five AIG execs loudly threatened to quit if the pay limits stick. Feinberg had previously exempted AIG CEO Robert Benmosche from a $500,000 salary cap at AIG. Now Feinberg’s office says other exceptions to the salary cap will be forthcoming. The exceptions, a pay czar office source insists, will all be totally “unrelated to the five executives’ threats to leave.” 

The tiny Swiss canton of Uri wants to become the next big global financial center, and Britain’s new bonus tax, Uri officials believe, just might help. They’ve begun circulating a promo DVD in British financial circles, hoping to “poach disaffected London bankers.” Uri’s main attraction, besides statutes of legendary hometown hero William Tell: rock-bottom tax rates. But London retailers and realtors who cater to the super rich aren’t particularly worried about Uri’s charms. The reason: The Chinese are coming. Wealthy Chinese shoppers are already outspending their Russian and Arab peers in London’s elite Mayfair district, and luxury realtors say they’re seeing “a surge in interest” from Chinese buyers. What’s making Chinese mega millionaires so hot to trot outside China? One factor: Chinese deep pockets aren’t feeling much love back home. A remarkable 96 percent of the Chinese public, says a new China Daily poll, “feel resentful toward the rich.” China, with 130 billionaires, now trails only the United States in the global super-rich sweepstakes . . .

Jeffrey ImmeltA new report, from the Institute for Policy Studies and three other national groups, is documenting a dramatic dropoff in federal help for America’s poor. The share of poor kids supported by the top federal temporary aid program has sunk from 62 percent in 1995 to 22 percent in 2008. Among those apparently bothered by that trend: General Electric CEO Jeffrey Immelt. Noted the exec last week, in a speech at at West Point: “The bottom 25 per cent of the American population is poorer than they were 25 years ago. That is just wrong.” Who’s to blame? Immelt unexpectedly pointed to the “meanness and greed” of his fellow business leaders. Charged the G.E. chief: “Rewards became perverted. The richest people made the most mistakes with the least accountability.”

Those richest people, suggests a new paper from the prestigious McKinsey consulting group, are still making the same mistakes — by assuming that enterprises need to hand out lavish monetary rewards to succeed. In reality, argue McKinsey analysts Martin Dewhurst, Matthew Guthridge, and Elizabeth Mohr, “numerous studies” have shown that nonfinancial incentives — like recognition and opportunities for career growth — can be “more effective than extra cash in building long-term employee engagement.” Cash bonuses and stock options, the McKinsey analysts explain, “mainly generate short-term boosts of energy” that can often have “damaging unintended consequences.”

Quote of the Week

“What better way for the [Obama] Administration to show its independence from the moneymen than by spoiling their Christmas dinners with the announcement of a surtax on their beloved bonuses?”
John Cassidy, Will Obama Tax the Banksters? The New Yorker, December 9, 2009

Stat of the Week

Where do Wall Streeters go to sleep at night? A good number park their heads on pillows in Connecticut’s Fairfield County. Their presence, new Census Bureau data indicate, has made the Bridgeport-Stamford-Norwalk metro area the most unequal urban space in the entire United States. The area’s top 5 percent of households average $823,000 a year, 49 times more annual income than the area’s poorest 20 percent. Between 2004 and 2006, an analysis of Census data last year found, America’s top 5 percent overall averaged 12.2 times more income than the nation’s bottom 20 percent. In the late 1980s, the top 5 percent outpaced the bottom 20 percent by just 8.5 times.

In Focus

The ‘M&A Follies’: Will the Curtain Ever Fall?

What may be the dumbest corporate merger of all time — the $165 billion deal that saw AOL gobble up Time Warner — has finally ended. AOL last week formally spun off and became a totally separate and independent corporate entity.

The AOL-Time Warner merger, initially brokered back in 2000, had been a disaster for years, by every standard measure of enterprise success. Indeed, the merger had essentially become a joke, a move so excruciatingly wrong-headed that observers from outside could only laugh at the sheer folly behind it.

The yucks started breaking out when execs at the newly merged media giant forced Time Warner-side staff to use AOL’s email system. That email, designed for consumers, bombed totally as a workplace tool. Large attachments crashed the system. Messages vanished. Amazingly, that fun went on for a year.

But the merger would be no joking matter for the thousands of workers who lost their jobs as execs of the new AOL Time Warner rushed after the “synergy” they claimed their merger would surely create.

Actually, the merger may have been more theft than joke. The AOL and Time Warner execs who cut the merger deal ended up laughing all the way to the bank. Time Warner’s numero uno cashed out $153 million in stock option profits in the merger’s first year. AOL’s top gun collected $100 million in the second.

Those windfalls, of course, came as no surprise. Corporate executives, in the modern global economy, don’t cut merger deals to create better companies. They merge simply to create bigger companies — because bigger companies mean bigger rewards for the executives who cut the deals.

Those executives whose companies get swallowed walk away with lush golden parachutes. The execs who do the swallowing get larger paychecks because they have larger companies to “manage.”

Only the foolish among these executives, of course, actually do much managing. The more clever just keep cutting deals. Nonstop “multibillion-dollar buyouts of rivals” have, for instance, boosted Larry Ellison, the CEO of Oracle business software, to a $27 billion personal fortune, America’s third-largest.

Hewlett-Packard CEO Mark Hurd is catching up quick. He wheeled and dealed 31 mergers in the 46 months after he became the H-P chief in 2005. Last year Hurd collected just under $40 million in salary and new stock incentives — and gained another $25.8 million from incentives collected in previous years.

The enormous wealth that mergers create — or, to be more accurate, the enormous wealth that job slashes and price hikes by newly merged companies snatch away from workers and consumers — doesn’t all funnel into corporate executive suites. Mergers leave investment bankers equally flush.

Wall Streeters who specialize in “mergers and acquisitions” — the M&A crowd — have as much a vested interest in buying and selling companies as corporate execs. Bankers take a percentage cut of every merger deal.

That percentage varies. The bigger the street rep of the investment banker, the bigger the fee. One study by Federal Reserve analysts, published in 2002, found that merger fees, overall, average 1.2 percent of total transaction value.

In the six-year period that study examined, Goldman Sachs collected $2.7 billion in merger fees. The four other top merger advisors, over that same period, took in another $6.5 billion.

For individual investment bankers, the M&A rewards can be enormous.

Consider superstar banker George Boutros of Credit Suisse Securities. We don’t know exactly how much Boutros is going to take home from his work on Oracle’s recent $7.4 billion takeover of Sun Microsystems. But we do know that Boutros personally pocketed a $40 million payday when he bargained the $20 billion merger that fused telecom powers Ascend and Lucent.

Last year’s global financial meltdown put a crimp on the M&A fee revenue stream. But the M&A boys have come right back. In November, the monthly global M&A volume hit $305 billion, a big jump from earlier in the year and not far off the $384 billion monthly average record set in 2007.

And the good news — for the M&A crowd — just keeps coming. The November merger deal totals don’t include the $30 billion deal, announced earlier this month, that will give cable giant Comcast a majority stake in NBC Universal. A full third of major corporate chiefs, notes a new Ernst & Young survey, plan to cut a new merger deal within the next 12 months.

All this merger wheeling and dealing will add billions into the pockets of the executives and bankers who cut the deals — and cost workers and consumers billions more.

At a time of record joblessness, more jobs will disappear as newly merged companies ax newly “redundant” workers. At a time of tight family budgets, consumer prices will climb as newly merged firms exploit their more dominant market share and flex their marketplace muscles.

The financial sector reform legislation that passed the House of Representatives last week offers consumers some much-needed protection from the credit card and mortgage-lending games today’s financial giants so enjoy playing. But the new reform bill does nothing to limit the mighty rewards that merger games can bring to the bankers and executives who play them.

We need more reforming. Until we have it, those games will continue — and workers and consumers will continue to lose.

In Review

A minimum tax on the incomes of the rich?

George Irvin, Dave Byrne, Richard Murphy, Howard Reed, and Sally Ruane, In Place of Cuts: Tax reform to build a fairer society. Compass, London, November 2009.

In a world grown accustomed to bankers getting their own way, last week’s announcement of a new 50 percent tax on this year’s UK-based banker bonuses generated a spirited round of global cheering. But the UK move, taken in a bit broader historical perspective, doesn’t much more than inconvenience the financially favored.

In Place of CutsIn the late 1970s, Britain’s rich actually faced an 83 percent tax rate on income in the top tax bracket, with an additional surcharge for investment income. That top rate dipped to 60 percent in 1979 and currently stands at 40 percent.

U.S. tax rates have followed a similar trajectory. The top-bracket rate, 91 percent until 1964, dropped from 70 to 50 percent in 1981 and eventually settled in at 35 percent.

Hardly any prominent politicos, in either Britain or the United States, ever talk about those hefty mid-20th century tax rates on high incomes. Instead, they prattle on endlessly about budget deficits and the necessity of slashing what government spends.

In effect, notes this new report from the UK Compass think tank, these pols have been maneuvering to turn the public anger over last year’s global financial crash “into a flimsy consensus about public spending cuts.”

But such cuts, says Compass, ought be considered “neither essential nor inevitable.” They “must be contested.” This new report details how.

The details speak to British realities. But the basic notions Compass lays out in these pages would make equal sense in the United States.

One example: Compass suggests a “minimum” tax rate on affluent incomes. Those making over £150,000 — about $220,000 in U.S. terms — should pay, Compass recommends, at least 50 percent of their total income in tax.

In the United States, top-earners did pay at least 50 percent of their incomes in tax right after World War II. Their rate today: less than 25 percent.

Compass also calls for ending the preferential tax treatment of capital gains income — the profits from buying and selling stock and other property — and proposes a new tax on speculative activity. The sum total of these and other moves, the think tank documents, would raise enough funding to ensure decency for all British families and green the UK infrastructure.

The Great Recession, Compass sums up, offers an opportunity for reconsidering “what sort of world we want to live in.”

“Do we want to go back to how things were before: unsustainable growth, boom and bust, growing inequality, stress, anxiety and exhaustion for all?” ask the authors of In Place of Cuts. “Or is it time we had a different vision of the good society, one that is more equal, sustainable, and democratic?”

Good questions for Britain — and everywhere else.

New Wisdom on Wealth

Joseph Lazzaro, Tax the rich? Americans say ‘yes’ — and spend more on job training too. Daily Finance, December 11, 2009. A new Bloomberg national poll says two-thirds of Americans want to see taxes raised on households making $1 million or more.

Working Group on Extreme Inequality, How Unequal Are We? This new data package of charts and factoids sums up the latest stats on U.S. income and wealth inequality.

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