The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it.
These pages have voiced strong doubts over the years about the leadership and compensation practices that prevail at many of America’s corporations. Chief among the criticisms were that these plans provided incentives and rewards that caused companies to take improper risks which allowed CEOs to rack up huge gains in the short run while investors — and, ultimately, society — were left holding the costly bag of empty promises when reality came crashing down.
Take Bank of America, for example, which recently settled with the U.S. Justice Department by agreeing to pay a record $17 billion in penalties and restitution. In the long history of American business, there has never been anything approaching this outsized penalty. It stems from improprieties at Countrywide Financial, which B of A bought in another fit of misguided thinking, just before the onset of the Great Recession. There were also irregularities involving disclosures about its takeover of Merrill Lynch as well as with Bank of America’s own mortgage practices.
You might think that CEOs and boards are paid well for keeping companies out of trouble and avoiding these kinds of disasters. Half of that observation is certainly true. In the five years leading up to the crash of 2008 and the beginning of the worst recession since the Great Depression, B of A’s CEO Ken Lewis was paid more than $200 million. Each of the bank’s directors awarded themselves a minimum of $1.5 million in the same period. Many collected more.
When he retired in 2009, Mr. Lewis walked away with a further $83 million in retirement benefits. Others connected with B of A, such as former Merrill Lynch CEO John Thain and Countrywide Financial’s former CEO Angelo Mozilo, also made off with huge fortunes as a result of deals made with the bank under Mr. Lewis.
And for all that, one of America’s most prominent financial institutions did not walk — it ran — into the giant propeller of U.S. government in a predictable and avoidable financial collision that resulted in this staggering record payout.
Bank of America was, as we documented over the course of several years, far from alone in practicing financial acrobatics that were more suited to a travelling carnival than an iconic institution of capitalism. Yet in this mighty tsunami of boardroom wrongdoing and excess that nearly upended Main Street, barely a ripple of bother was felt among the first-class decks of Wall Street and America’s financial elites. No CEO has been sent off to jail. No director or chief executive has been forced to return any pay. As we noted in The Fallacy of Giants, in most cases when these kinds of eye-popping settlements are announced, the company’s stock shoots up. Government fines, no matter how staggering, and accusations of abuse and betrayal by top management and boards, no matter how shameful, are regarded by many business insiders and much of the market as just another cost of doing business.
The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it. The result is that those same elites in the period between 2007 and now managed to gain an even larger choke hold on the wealth and income of America than at any time since the 1920s. This, despite the fact that were it not for the bailout provided by America’s taxpayers who largely live on Main Street, not only would this expansion of wealth not have occurred, but capitalism itself might not have survived. On that point, is it not interesting that the same voices that are generally quick to rail against government excess and demand fiscal discipline when it comes to the public purse are uncharacteristically silent when it comes to the $5 trillion the U.S. Fed paid to finance the bailout? Does that have any connection with reality, or is it just another case, like CEO compensation, for instance, where there is one set of ever accommodating rules for those at the top and another for everyone else?
What happened with Bank of America, and other prominent institutions like it, and the ease with which moral and legal improprieties can be sloughed off with little consequence for those in charge, is at the heart of the current record level of public disaffection with capitalism and those who lead it. Having spent nearly half a century working with and around capitalism and its leaders, it is hard for me to imagine that one day it may cease to exist. But the too often overlooked reality is that the fundamental currency that sustains modern capitalism is not capital at all — it is the consent of the public.
If present trends in income equality and corporate immorality continue, and its leaders fail to ensure that capitalism is governed by a set of values that is consistent with the needs and dreams of Main Street, it is hard to imagine how it will survive.
When he became BP’s CEO in 2007, Tony Hayward was quoted as saying that he would focus on safety matters like a laser. But his mind-blowing evasiveness and complete failure to show what he did in that regard before a frustrated Congressional Committee proved he could not muster the intensity of a bathroom nightlight.
America, and a good part of the world, have seen a number of unimpressive Congressional performances on the part of business leaders in recent months and years. Appearances by the heads of Citigroup, Goldman Sachs, Countrywide Financial and the major Detroit automakers leap to mind. But nothing can compare with the spectacle of BP CEO Tony Hayward, who testified — and the term can only be used in the loosest sense — before a subcommittee of the House Energy and Commerce Committee on Thursday. It is hard to imagine a more profuse display of insincerity, evasion and stonewalling on the part of the man who leads the company which saw the deaths of 11 workers on its Deepwater Horizon oil rig and caused the worst environmental disaster in U.S. history. Far from taking responsibility for what occurred on his watch, he pointed his finger at everyone lower down in the organization. Apparently, not even the company’s alarming emails indicating problems with the rig prompted any further investigation on Mr. Hayward’s part. His knowledge of the spill and the causes leading to it seemed no better than the what could be expected from the average housewife in Minneapolis who has never been on an oil rig, much less been paid $6 million in compensation for heading a global oil company. It was, in short, a performance that would have made Bruce Ismay, the infamous head of the White Star Line who owned the Titanic and managed to find his way into a lifeboat as the great ship was sinking, blush with embarrassment.
When he became CEO in 2007, Mr. Hayward was quoted as saying that he would focus on safety matters like a laser. But his mind-blowing evasiveness and complete failure to show what he did in that regard proved he could not muster the intensity of a bathroom nightlight.
A few days ago we suggested that the repeated failures of the company to arrest the spill and recap the well should prompt President Barack Obama to fire BP and put a new crew in charge. Since that time, the amount of oil still spewing from the well has increased dramatically. The spill has taken an even greater toll in terms of nature, shorelines and jobs. From a business perspective, no CEO has ever presided over a more horrendous loss of share value or such a steep decline in both investor and public esteem.
What is abundantly clear from today’s exhibition is that it is time for BP’s board to fire Mr. Hayward. He simply does not comprehend how a leader is expected to act in a time of crisis. To not do so immediately would be for BP to inflict yet more insult and calamity upon an investing public that has been shamefully beleaguered by management’s negligence and a shocked American public that is forced to witness this slow motion horror worsen with each day.
Fire BP. Incompetence, pure and simple, for the mishandling of the worst environmental disaster in U.S. history.
When the Titanic sank in 1912, it was the biggest calamity of its kind in history. Fortunately, the world was spared the spectacle of seeing the captain and owners repeatedly botch the rescue of the survivors. But that is precisely what is taking place with BP’s startling display of incompetency in failing to cap the oil well that continues to gush millions of barrels of crude from the bottom of the ocean.
BP’s long list of missteps that have brought it to this point, and will likely lead to its demise as a global oil company, have demonstrated that its judgment cannot be relied upon. Warning signals were ignored. Solutions have been bungled. Time frames have been missed and extended repeatedly. The amount of the spill has been consistently underestimated. Now we are told that it may be months before the well is fixed, according to BP’s best guess. Not good enough. BP’s time has run out. Bold action on a war footing is now required by the United States government.
Before the Obama administration becomes painted by the same brush of incompetency and indecision with which BP has tarred itself, the company should be fired immediately and removed from its current position. BP’s American assets should be frozen pending civil and criminal investigations. This is an appropriate move for the company that has become the Titanic of environmental disasters and may well have acted in a criminally negligent fashion. BP has abrogated its right to fix the problem. It is the problem.
New expertise needs to be recruited quickly and the full force of the U.S. government needs to be evident and placed both on the ocean site and on the land’s toxic assault. The presence of a U.S. Navy aircraft carrier fleet at the scene, from which the capping and ocean clean-up activities would be coordinated, and the establishment of a high-level government agency to deal with the human and ecological catastrophe in the Gulf region would offer a new approach that is urgently required. People need to see that that someone is actually on top of the disaster now — not making it worse day after day after day.
This is the worst man-made ecological catastrophe ever to occur in the United States. The damage to the ocean, to its stock of fish and wildlife and to the people who depend up on it may well go beyond what the imagination can now conceive. A further misstep by BP, which seems entirely likely given its record, could deliver a crippling blow to the area and to the Obama administration, for that matter.
How the President manages that challenge and whether his administration is capable of mounting a sea-changing response, or is merely a hapless bystander in observing the repeated blunders of others, will be something that America’s enemies are eager to learn. It is also something that millions who make their living from the sea and the region most affected are desperate to see with all available haste.