7 February 2011

About Too Much,

a project of the

Institute for Policy Studies Program on Inequality

and the Common Good

The Wall Street bankers who tanked the global economy haven’t just escaped jail. They’ve escaped ridicule. The media still take their utterances seriously. Lawmakers remain respectful whenever they drop by Capitol Hill.

How different the scene, back in 1933, when the Senate Banking Committee called J. P. Morgan Jr., the world’s most famous banker, to the witness table. The panel’s chief counsel, Ferdinand Pecora, grilled J. P. and his partners day after day, and that aggressive grilling had one Senate apologist for the bankers, relates one historian, complaining royally about the “circus” atmosphere.

That complaint, in turn, inspired a Barnum & Bailey publicist. The next day, this publicist walked into the hearing room and dropped a 27-inch-tall circus performer onto J. P.’s lap. Photos of the episode would soon grace America’s front pages — and ensure maximum visibility for Pecora’s tough final report.

Two weeks ago, after a year of quiet hearings, our contemporary Pecora panel released its final report. But this tough report from the commission Congress set up to investigate the run-up to the Great Recession has yet to gain any serious media traction. That’s a shame. We explain why in this week’s Too Much.

The billionaire Koch brothers, Charles and David, have been in the news a good bit lately — for their massive bankrolling of various initiatives that aim to make America ever more rich people-friendly. Their older brother Frederick, on the other hand, doesn’t seem to dabble in politics at all. He just rakes in the benefits. The latest example: Frederick’s mansion on New York’s Upper East Side has just registered the largest market value increase of any residential property in the entire city, jumping from a $20.8 million valuation last year to $31.2 million. But Frederick’s property tax bill has only jumped $871. The reason: Current law doesn’t let city assessors boost the taxable value of residential properties, mansions included, over 6 percent per year or 20 percent over five years. New York could certainly use a little more help from mansion owners. City public services are now facing an 8 percent funding cut, effective July 1 . . .

Few CEOs have ever thought more highly of themselves than Lou Gerstner, the former IBM chief who has pontificated nonstop about public policy since his 2002 retirement. Last week, in the Wall Street Journal, Gerstner offered his advice on how best to cut “the cost and size of government.” His main pitch: “Allow no exceptions.” Giving “sacred cows” special treatment, Gerstner warned, undermines “the sense of shared sacrifice” essential to any serious “restructuring.” Gerstner should know. At IBM, he replaced the pension plan that guaranteed employees a safe, comfortable retirement with a 401(k) that shifts all retirement responsibility — and risk — onto employees. Big Lou himself took home $127 million in 2001, the year before he retired with a $1.1 million guaranteed annual pension . . .

Golfer Tiger Woods will be shlepping halfway around the world this week, to compete at the Dubai Desert Classic. But Tiger, the world’s wealthiest athlete, won’t be finding any respite in Dubai from the bad news that has trailed him for over a year now. Gone kaput since 2009: Tiger’s marriage, his winning touch on the golf course, and $35 million in annual endorsement income. Also now kaput: the $1.1 billion “Tiger Woods Dubai” luxury resort first announced in 2006. The resort’s developers promised to ring a Tiger-designed 18-hole golf course with 200 villas that would start at $11 million each, all surrounded by 11,000 imported trees. That promise has proved a mirage. The developers finished only a handful of villas before Dubai’s housing market crashed. Last week they “confirmed” an indefinite hiatus. Woods reportedly received up to $25 million upfront for the project and would have made tens of millions more on royalties . . .

Michael Breman aims to please — and that’s getting harder and harder. Breman runs sales for Germany’s premiere luxury yacht builder, and his super-rich clients from all over world, a news report last week noted, “are becoming increasingly eccentric.” The current craze: shower heads — costing just under $25,000 each — that allow bathers to control the water droplet size and speed. One Russian oligarch is even demanding a yacht shower that can spray either water or champagne. Matthias Voit, an exec at the German firm that manufactures specialty showers, sees no problem managing that request. Only one question, he says, remains unresolved: “whether the champagne should be warm or cold.”

China doesn’t have much of a super-yacht industry yet. But overall, analysts believe, China stands poised to seize the global “luxury limelight.” A new projection, just out, is estimating that Chinese buyers will “account for as much as 44 percent of global luxury sales by 2020, up from 15 percent now.” In 2000, notes the CLSA investment group, only 24 Chinese nationals held as much as 1 billion yuan, or $151.7 million. Last year, China tallied 1,363 yuan billionaires. China’s growing “luxury cult” has now spilled beyond Shanghai and Beijing. In Xiamen, a coastal city of 2.5 million, Porsche’s showroom last year moved out 1,370 cars, and Lamborghini unloaded a sports sedan for over $1.1 million.

Peddling Poison for Fun and Profit

Wall Streeters made fortunes, the new official report on America’s 2008 economic meltdown charges, defrauding the public. They’re still making fortunes — and this new official report is already sinking out of sight.

A quarter-century ago, in 1986, the biggest Wall Street banker paycheck went to John Gutfreund, the Salomon Brothers CEO. Gutfreund pulled in $3.2 million. Two decades later, in 2006, Merrill Lynch CEO Stanley O’Neal pocketed $91 million.

To understand the 2008 Wall Street meltdown that cratered the U.S. economy, suggests the new final report from the panel Congress appointed to probe the causes of that crater, you need to understand this enormous pay explosion — and the fierce incentive this explosion created for reckless and fraudulent behavior.

How reckless and fraudulent? In the years that led up to the 2008 meltdown, the Financial Crisis Inquiry Commission report released late last month details, Wall Street’s top bankers and financiers “made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective.”

These same bankers borrowed, based on these securities, tens of billions of dollars “that had to be renewed each and every night” and then traded these billions in totally unregulated, semi-secret, financial “derivative” gambles.

This frenetic financial folly would eventually leave four million homes lost to foreclosure and another four and a half million American families either ensnared in the foreclosure process or seriously behind on their mortgage payments.

“Nearly $11 trillion in household wealth has vanished,” adds the Financial Crisis Commission final report, “with retirement accounts and life savings swept away.”

That sweeping never reached Wall Street’s executive suites. The executives and traders who orchestrated the meltdown’s financial devastation have either walked away with fortunes — or resumed, post-meltdown, their fortune making.

The top five execs at Bear Stearns, for instance, all lost their jobs when that investment house collapsed in 2008. But in the eight years before that collapse, notes the Financial Crisis panel, these five “took home over $326.5 million in cash and over $1.1 billion from stock sales.” Their windfall exceeded the annual budget of the SEC, the federal agency that’s supposed to keep Wall Street honest.

Why didn’t regulators from the SEC and other agencies keep better tabs on Wall Street’s behavior? The same pay explosion that gave bankers an irresistible incentive to defraud inhibited effective regulation. Agencies couldn’t afford to compete with Wall Street to retain knowledgeable financial professionals.

The Wall Street pay explosion also helps explain why this Financial Crisis panel final report — a clear, compelling read — appears to be going nowhere. The 545-page paper, since its January 27 release, has sunk, like a rock, from public view.

Reports from blue-ribbon panels don’t, of course, always sink. They sometimes help crystallize public outrage and serve as a useful stepping stone to fundamental reform. In the Great Depression, the Senate Banking Committee’s celebrated Pecora Commission report played just that role.

But blue-ribbon reports, to make an impact, need political patrons, elected leaders who’ll talk the report content up, in news conferences and speeches, and demand immediate action to correct the ills that report content identifies.

The Pecora Commission report had plenty of those patrons, including President Franklin D. Roosevelt. The Financial Crisis Inquiry Commission has had virtually none. The White House has done next to nothing to give the report legs, and neither have many Democratic lawmakers.

Republicans, for their part, have followed the lead of the four GOP appointees on the panel. All four “dissented” from the main report, and their convoluted rebuttal to the majority report has allowed conservatives — and much of the media — to dismiss the Financial Crisis panel report as a purely partisan exercise.

Why all the haste to bury this report? Politicos on both sides of the aisle have essentially become too dependent on Wall Street. The report itself supplies the basic numbers: From 1999 to 2008, the financial industry dumped over $1 billion into political campaigns — and spent another $2.7 billion on lobbying.

That money has kept the Wall Street money machine percolating nicely. Total pay in the financial sector, the Wall Street Journal reported last week, topped $135 billion last year, a new record. Overall, concludes the Council of Institutional Investors, pay practices on Wall Street “have worsened” since the 2008 crisis.

The American people, meanwhile, remain absolutely outraged. Over 70 percent of Americans, a Bloomberg poll found this past December, want big bonuses banned this year at Wall Street firms that took taxpayer money.

People power, of course, can check money power, but only if organized. In the Great Depression, people did organize. The hugely influential Senate Banking Pecora Commission operated against the backdrop of a mobilized popular uproar.

The lesson for today? Even the most compelling blue-ribbon reports can’t, on their own, drive real reform. The pressure to end the pay excess behind the horrors the Financial Crisis Inquiry Commission has so exhaustively chronicled is going to have to come from average Americans.

The Financial Crisis Inquiry Commission has its final report available online, for free download. Interested in organizing, in your community or congregation, for economic security and justice? Check the Common Security Club network.

A Business Case for Greater Equality

The Nordic Way: Shared norms for the new reality. A report prepared for the World Economic Forum in Davos, Switzerland, January 2011.

President Obama has opened 2011 preaching a new gospel: competitiveness. To succeed economically, his argument goes, the United States must become more “competitive.”

So where do we start? How about looking at societies that are already competing quite nicely? Maybe they have lessons to share.

These societies, turns out, do feel they have lessons to share. Better yet, the four nations that rate highest on global “competitiveness” benchmarks seem to be in a sharing mood.

Last month, at the World Economic Forum in Davos, corporate and government leaders from these four nations — Sweden, Norway, Denmark, and Finland — brought a special report that lays out what they feel gives them their distinct competitive edge.

A distinct competitive edge — for Scandinavia? Conservatives all around the world would find this notion ludicrous. They’ve been arguing for years, as this new report wryly notes, that the Nordic economies are going to crash any minute.

In this conservative world view, the Nordic economies represent a compromise between socialism and capitalism that can’t possibly last — since “the costly and unproductive ‘socialist’ elements of the model were bound to overwhelm the productive ‘capitalist’ aspects that had been allowed to remain.”

But the Nordics, contrary to these dire predictions, are doing just fine. They’ve survived the Great Recession much better than the rest of the developed world.

The Nordics also boast budget surpluses and low public debt, not to mention “long-term political stability, transparent institutions, technological adaptability, flexible labor markets, open economies, and high levels of education” — all the elements that business analysts say make for competitive economic success.

The secret to this success? The Nordic business and policy leaders behind the Nordic Way report, a group that includes the chairman of the largest industrial holding company in Northern Europe, brought a somewhat surprising answer to their global corporate and governmental colleagues gathered in Davos.

The Nordic nations, these entrepreneurs and elected leaders maintain, value individualism, so much so that they make sure — through a tightly knit social safety net — that no individual ever has to feel beholden to another.

Individualism, The Nordic Way goes on to argue, “need not lead to social fragmentation, distrust, and short-term maximization of material interests.” Quite the opposite. Individual autonomy can “lead to greater social cohesion if it is done in an egalitarian way.”

And that’s what the Nordic nations have done. Sweden, Norway, Denmark, and Finland all rank among the world’s most equal nations. The resulting social cohesion nurtures a “high degree of trust” — a trust in each other, in the law, in the strong governmental institutions that guarantee the social safety net.

This trust, Nordic business leaders believe, translates into the “systemic advantage” that economists have labeled “low transaction costs.” People who do business in Scandinavia spend less time hassling with lawsuits and paperwork

Critics, The Nordic Way acknowledges, see “political and cultural drawbacks” to the Scandinavian “commitment to personal autonomy, a strong state, and social equality.” Such a commitment, the attack on the Nordics posits, generates “conformity, loneliness, and an intrusive bureaucracy.”

The Nordic Way sees a different Scandinavian reality: societies full of “citizens who feel empowered, accept the demands of modernity, and are willing to make compromises to achieve economic efficiency and rational decision-making.”

The ultimate “take-away” message that Nordic business and government leaders want their peers elsewhere to take to heart?

“In the Nordic countries,” The Nordic Way sums up, “social trust, confidence in state institutions, and relative equality coincide.”

In the United States, this trust, confidence, and equality have gone by the boards. To become “competitive,” we have work to do. A lot.

Too Much, an online weekly publication of the Institute for Policy Studies | 1112 16th Street NW, Suite 600, Washington, DC 20036 | (202) 234-9382 | Editor: Sam Pizzigati. | E-mail: editor@toomuchonline.org | Unsubscribe.