They Awarded Each Other Dynastic Wealth And Gave Savers This?

Back in the mid-1990s, after we had purchased and fixed up our home, we had a little savings left and decided to set it aside for the next big expense, the education of our children, toddlers at the time. With a long time horizon, and willing to settle for whatever the average U.S. stock would return, we put it in a Total Stock Market index fund with a low-cost mutual fund company. With college looming we removed the money from that fund last week, and so I have a pretty good idea what savers who invested in stocks, on average, have received over the past 13 years. Despite reinvesting dividends (such as they were), dividends on which we paid taxes from other funds, despite not putting money in at one of the bubble peaks, and despite the low fees charged by our mutual fund company, we merely got the same amount of money back. Money that is now worth 25% less based on overall inflation, and far less relative to the cost of higher education, which is a whole additional discussion in itself.

I bring this up on Room Eight not to complain about my return, because you pay your money and take your chances. I mention this to show that the excuse used to justify the soaring share of national wealth paid to top executives over the past 15 years, the purported need to attract the greatest superstars to enhance shareholder value, has been a fraud. Because the average team of corporate executives has delivered zero shareholder value over the long term -- or far less, adjusted for inflation and taxes -- while being richly rewarded for it. They took everything for nothing.

Every executive, it seems, has been paid as if they were Steven Jobs of Apple, the price of whose stock fluctuates on rumors of his health such is the general perception of his value. Actually that’s not so. The New York Times recently published a table of CEO pay and Steve Jobs was near the bottom, presumably because his pay is structured in such a way that he only gets big bucks if the company does well, and the recession has affected even Apple. Others get paid far more, even in companies headed for bailout or collapse.

How has this occurred?

Many years ago, a friend worked as a computer programmer for Insurance Services Organization (ISO), a firm that compiles data on insurance losses from insurance companies and aggregates them together so each firm could base its underwriting on the average rate of loss as a whole, and not just on their own firm’s records. Although this purpose is entirely legitimate, the firm was under constant suspicion by anti-trust authorities that it was also helping insurance companies collude to set insurance rates higher. The investigations extended to questions about computer code written by ISO’s programmers for its data runs.

Somehow the same level of scrutiny has not been extended to the small cabal of executive pay consultants. Executive A on the board of company A would hire the consult to prove that Executive B was getting X, so to be competitive and enhance shareholder value Executive C had to be paid X-plus. Executive B would sit on the board where Executive A was the CEO, and hire one of the same group of executive compensation consultants to point to Executive C and pay even more to Executive A. And so it goes, upward and upward, like the Nassau and Suffolk county police, based on nothing but itself. The top executives are only compared with each other, not with other workers, the economy as a whole, or middle managers who might have done just as well in their place.

Any executive consultant that advised that, you know what, they guys really aren’t worth all that money, would never be hired again. Just as the bond raters would only be hired if the soon-to-default bonds would be rated AAA. Just as the appraisers would only be hired if they said a property was worth whatever the mortgage broker wanted to lend against it. Just as the public employee pension actuaries would only hired if they said that a deals to enhance public employee pensions would actually cost nothing. All lies -- profitable lies for those who told them, massively enriching lies for the marauding Visigoths who paid for them. And so, the United States has been financially sacked.

In fact the actuarial lies about the pensions, which are going to destroy public services and send them back to the 1970s in New York City and elsewhere, had a feedback loop to the stock market. Both the executives and the public employees of Generation Greed used a couple of stock market bubbles to lie about what actual returns were, and claim that they could extract a soaring share of our economy without it coming at the expense of anyone else. (The public employee retirees have a back-up lie -- that if they get more it comes at the expense of the rich, not less well off people who pay higher taxes and received diminished public services and benefits).

New York’s public employee pensions assume that a return of 8 percent per year will be had, not from the mid-1990s, but from the peak of the stock market bubble in 2000. The longer they can get away with that lie, the longer they can let the pension funds go in the hole, and hide the devastating consequences of all those pension enhancements from those whose lives will be permanently an irrevocably diminished -- all so those cashing in and moving out can work 15 to 20 years less than they do, without saving out of their own income.

But let’s get back to the destruction of private sector institutions rather than public. It isn’t just that executives don’t deserve all that pay in exchange for zero return. It is that all that executive pay is probably responsible for that zero return. What in other eras might have been dividends for savers was turned into excess bonuses for executives, which are a rising share of total costs and, more importantly, increasingly large relative to dividends paid.

Even a tax law change wasn’t enough to convince companies to pay more dividends. Instead, they said that savers who kept putting money in would be rewarded with higher stock prices -- someday. Kind of like New Yorkers who keep paying taxes will have a Second Avenue Subway -- someday. Meanwhile, the executives simply handed more and more ownership of corporate America to each other, borrowing money to buy stock to temporarily inflate stock prices and justify their compensation packages. Some companies are now collapsing under the debts; others are issuing stock and slashing the investments of former shareholders.

Simply put, the executives who sit on each other’s boards, put in place under election systems that prevent the competition for office (just like the state legislature), took all the available money off the top and left the shareholders with nothing. Or less than nothing, when adjusted for inflation.

After all, while we may be in a recession now, it isn’t as if the past 13 years have been a bad time to make profits. Quite the contrary. It has been an era when excess profits could be earned because of an unsustainable debt binge that allowed business to pay private sector workers less and still have them spend more. In the long run that leads to bankruptcy and collapse, which it has, leading to much lower profits in the future -- when consumers will only spend what businesses pay them, minus any debts they actually repay.

It is no accident that the executives have gone to Washington with fistfuls of cash to influence the federal government to keep the game going a little longer, borrowing money that future generations, who will be much worse off, will have to repay to bribe today’s households, who can’t afford it, to buy more. Handing out $4,500 for the purchase of an SUV, even as transit systems collapse. Handing out $15,000 for the purchase of the McMansion after a 25-year period in which federal housing programs for the poorest have seen their budgets reduced perhaps more than any other type of federal spending.

Many of the families that ruled this country in the Post WWII decades had members who raked off money in the 1920s binge that led to the Great Depression. And yet we were not ruled merely by Bushes and Kennedys during those years, which were a golden age of equal opportunity compared with what is coming. Those who captured dynastic wealth and political control in this era of fraud and theft will in the future rule this country in their own interest, and to the detriment of an increasingly less well off and disenfranchised majority, for decades to come. With their praises sung by a media which has substituted press releases for truth.

(Let’s say this for Mayor Bloomberg. He didn’t enrich himself by pillaging Bloomberg LLP. The again, he owns the company, so there are no shareholders for him to fleece. He could hardly be expected to rob himself.)

As the standard of living falls, as savings erode, as taxes rise, as public services and benefits diminish, people will begin to ask themselves who is on the other side taking money out? Who knows where that anger will be channeled by the morally challenged people who cheat their way to the top in our society? That is a scarier concern than even gradual decline.

The truth is though the cost will come and come and come in the future, the money has already been extracted in the past. By today’s senior citizens, particularly ex public employees, who awarded each other many years of life without work served by others, to be paid for by those others someday. And by top executives in the alternative oligarchy, who justified legalized theft on a historical scale based on shareholder returns that would never be allowed to go to shareholders. It doesn’t matter if every CEO is paid the minimum wage from now on. Our past and future national wealth has already been grabbed by our new dynasties.