The promise of this new era of market miracles has been shamefully betrayed by a self-serving collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.
It was advertised as a sure path to wealth and prosperity for the world. If only American capitalism could be left unfettered. If only regulations would be loosened. If only CEOs could be incentivized with huge bonuses that would be paid out when their efforts resulted in a rise in stock. Just let the market work its magic, and the world would be changed forever. History will record that, in September of 2008, part of that promise was fulfilled. The world was changed, but not exactly in the way that was promoted. Over the course of a day or so, the world actually held its breath while the financial system glided Titanic-like ever so close to the iceberg that was Wall Street’s creation.
During the years leading up to the near calamity and the tsunami of disbelief that finally overtook Wall Street this week, more wealth was transferred by shareholders to CEOs than to any similar group or at any other time in history. Directors, too, made a huge cash grab to compensate, they claimed, for the heavy work load that was now being required of them. And regulators, like the Federal Reserve, were willing to do whatever Wall Street and the financial sector needed to keep the fees rolling in.
Wall Street and American business had pretty much all they wanted, except for those nagging requirements of the Sarbanes-Oxley Act of 2002. They, too, were well on the road to being blunted with the arrival on the job a couple of years ago of Henry M. Paulson, Jr. as the fresh-from-Wall Street Treasury secretary. Loosening the clutches of regulation was his first priority. “We must be careful not to kill the goose that lays the golden egg,” was the mantra of lobbyists, the Business Roundtable, right-wing think tanks, dark paneled boardrooms and not a few well-financed politicians.
But the promise of this new era of market miracles has been shamefully betrayed by a collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week. A few months ago, Secretary Paulson claimed we were closer to the end of the crisis than the beginning. Two weeks ago, he asserted that “the American people can remain confident in the soundness and resilience of the financial system.” His opinion seems to have changed with each of the crises he was incapable of foreseeing until it struck.
Rather than seeing itself transported to the promised land of a new prosperity, Main Street America finds itself today squarely plunked at the junction of Crisis Road and Bailout Boulevard. And those well-heeled CEOs who were trumpeted for their out-of-this-world skills with pay checks to match? They turn out to be as authentic and respectable as a third-rate circus act.
The tax-cutting Republican administration and Treasury secretary who were the biggest boosters of American business and free market capitalism have now become the biggest interventionists, writing the biggest bailout checks in American memory.
History will have much to say about the circumstances that led to this crisis. And it will ask with a decidedly more demanding voice than heard thus far among policy makers and commentators, how was it possible for American capitalism to have been permitted by its regulators, guardians and gatekeepers to have reached a point where decisions of CEOs and boards were so reckless that they ultimately brought the world’s financial system to the brink of collapse?
The answer will be seen, symbolically at least, through the prism of excessive CEO compensation, which some six years ago we described to the U.S. Senate Banking Committee as the most corrosive force in American business. We said then that the lure of huge bonuses tempted CEOs to take risks that cannot be sustained. The subprime meltdown is unsustainable risk writ large. It is another story of greed overcoming responsibility and of boards yet again, as they have in so many scandals in the past, acting more as a combination of cheerleader and ATM machine for overreaching CEOs instead of the wary sentries they are supposed to be.
As we predicted at the beginning of the year when it became apparent that Countrywide Financial would not survive on its own:
This is only the beginning of the bailout process that is unfolding…. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Significantly, all the failures, bailouts, meltdowns and write-downs have carried with them the earmarks of high abuses in CEO pay. Over the past five years, when the faulty, risk-oblivious decisions that led to the present crisis were being made, the CEOs of Merrill Lynch, Citigroup, AIG, Lehman Brothers and Bear Stearns received an aggregate compensation in excess of one billion dollars. One only has to recall the antics of Bear Stearns’s James Cayne, the colossal greed of Contrywide’s Angelo Mozilo, the dissembling of Lehman’s Richard Fuld and the narcissistic actions of Merrill Lynch’s Stanley O’Neal -who waltzed off with more than $160 million after leaving investors stung with multi-billion dollar write-downs and losses- to be persuaded of the depths to which the leadership of Wall Street and the financial community has fallen. With captains like this, and the apparently vision-blind Henry “the American people can remain confident in the soundness and resilience of the financial system” Paulson at the helm, the surprise is not that the financial system has been teetering on the abyss, but that it has not fallen in more often.
Now the $700 billion price tag for the excesses and failures of those in charge has arrived at the doorstep of every American home with a gigantic thud. This is on top of the estimated $800 billion in federal commitments and outlays caused by the subprime debacle so far.
And a larger cost is yet to be calculated. It is in the form of a crumbling in the pillars of confidence necessary to the functioning of free markets and a collapse in respect for those who claimed they could be trusted to do the right thing. As we have noted before, in many cases boards could not even be trusted to meet regularly and assess the risks they were presiding over. Another consequence of the massive sums that will require mammoth increases in foreign borrowing: the United States will be thrown further into the embrace of China, a traditional major buyer of U.S. debt. What geopolitical ramifications may result from the U.S. becoming even more beholden to that communist regime do not appear to have found their way onto the radar of most American policy makers.
But the more lasting outcome of this crisis and the cost to extricate the financial system from it will be that American citizens will have to pay for it with their own well-being. It is difficult to imagine how any universal health care plan will be possible in a new administration; nor will the huge sums being committed to the bailout of Wall Street’s excesses permit major outlays for job creation or infrastructure support. Inflation and a lower dollar will be harsh taskmasters in this new American economy and will hurt most of the very citizens on Main Street the Bush/Paulson Wall Street bailout plan purports to help.
As the United States now comes to grips with this trillion-dollar-plus inflection point in its history and how close it has come once again to a Titanic-like collision with the financial system, the enormity of the betrayal will become even more painfully evident.
Part of the social covenant binding America, built up over generations of struggle, is that capitalism must serve the public good and not just the privileged few. A stable, functioning economy and the right to prosper in it is the birthright of every American. Both have been hijacked by the self-serving purveyors of subprime governance, leadership and regulation.
They are a fitting focus for the indignation and anger of millions of Americans who have lost so much in jobs, homes and hope, and will be called upon for still more. We join them in their outrage.
We will examine the bailout plan, and the bankruptcy of the vision and moral leadership that produced it and are now seeking to profit from it, in a future commentary.