The Advocate escalates the battle

I was just settling in for a football playoff game. I had everything I needed: a TV. The phone rang. It was The Advocate. As I may have mentioned, he is not a pro sports fan.

“D.D., you’ve gone soft in your old age!” he barked into the receiver. “You’re letting the banks off the hook and you know it!”

In the background, I could hear Shirley shout: “Gus, your blood pressure! You’re gonna have a stroke over the bank bonuses!”

“My blood pressure is fine! What’s not fine in these thieves on Wall Street who are picking the public’s pockets!”

I turned off the TV. It was hopeless once he got to this point.

“Look, Gus, I’m trying to educate people here, and I’m trying to be objective about it.”

“Objective? How can you be objective about grand larceny on a massive scale? What, are they paying you off too?”

Oh boy.

“Yes, you offer information. You try to educate. But you offer no perspective, no insight, no solutions. No passion. Have you given up too?”

“Well, I …”

“Look, here’s the real story. And you can quote me. The Congressional ‘Economic Crisis Commission’ started hearings this week by inviting the CEOs of our banks and Wall Street giants to testify. They were asked to tell what went wrong and what needs to be done to prevent it from happening again.

“The hearings were focused on the extraordinary risk the lenders took and outlandish executive compensation during a time when the banks were failing and had to be rescued by the taxpayers. Regulators were also invited to testify.

“What I heard was mostly empty excuses justifying their compensation system while the SEC Chairman told the Commission there were serious regulatory gaps and summarized the very aggressive regulatory actions already implemented since she took office last year.”

Barely pausing for a breath, he raced ahead.

“The real problem was never addressed and in fact was the so-called elephant in the room. Financial services and banking execs get compensated based on what they do with other peoples’ money. They reap the rewards for generating higher revenues but they do so by placing the future risk of these transactions nearly entirely with the investors whose money is used to fund their operations. (Advocate’s emphasis.) This is a system based on extremely high executive financial reward while placing the risk on the investors.

“This means that executives can make millions in pay and bonuses while shareholders can suffer massive losses, which is precisely what happened. For example, Merrill Lynch paid out more than $3 billion in bonuses just before John Thain, its CEO, sold the failing company in distress to Bank of America. Then he had the nerve to demand a $10 million bonus! While Merrill Lynch was collapsing, this CEO spent $1.2 million refurbishing his office including $87,000 for a rug, four pairs pf curtains for $28,000 and $11,000 for fabric for a lampshade. A lampshade, D.D.! Like I’ve seen you wear on your head upon occasion.”

That, I felt, was uncalled for. But I chose not to respond. The Advocate leaped back in the ring to take another swing.

“Financial companies based in New York paid out $18 billion—yes, I said billion—in cash bonuses for 2009, the very year the banking industry collapsed and was rescued with hundreds of billions of dollars in federal bailout funds. This also is the year the major banks raised interest rates from an average of 8% to more than 25%, increased fees and reduced credit.”

And the year Chase took over our bank, WAMU, and reduced the interest rate on our account to 0.5%.

“Yes,” I said, “but aren’t the bank executives incentivized to manage for the long-term through their compensation agreements?” I was sure I had him here. “Certainly, they will work to reform their own industry.”

But no.

“The execs do receive compensation in the form of equity and thus have the opportunity to participating as investors in their own companies. But this has broken down to nearly a meaningless exercise.

“What’s happening is that the bank execs are increasingly cashing in their stock obtained via options exercise while rarely exercising options and holding the purchased stock for the duration of their employment as a personally paid for investment. This has led to the culture of great rewards with barely any personal financial risk nearly regardless of how the execs performed for the owners who after all, are the shareholders.”

Oh no! as The Dude might say.

“The argument the bank execs give is that the high compensation is required and deserved to keep the execs from leaving. Ha! This is a self serving argument because the very people who make such arguments refer to themselves because the industry has become a financial theatre of musical chairs. The tragic result of this self-serving exec compensation structure spilled over to the industry side where this philosophy was gradually adopted by most public corporations.”

“So in fact the Bad Bankers set the precedent for the rest of their industrial brethren?”

“Ex-ACTLY!” he barked triumphantly.

“Now today, we see where this has built up to the unsustainable level which materially contributed to the financial collapse. I did not hear much from the banking execs as to how they would resolve this problem. They will only say that they prefer to repay the TARP funds to avoid federal limits on their outrageous compensation rather than take a serious look at their compensation structure.”

“And your solution would be?” I said, putting The Advocate on the Hot Seat.

“Change regulations to require the buildup of some equity by top execs. Require them to exercise some options. Then further require that a significant amount of the acquired stock be held for a minimum time. This would build equity for the exec over time and expose the exec to the same financial risk as the cash investors.

“You see, D. D., the execs have gone astray. They have fallen by the wayside. They have sinned, and we are paying for it. We must bring them back into the fold, as the Old Testament advises. These wayward sons and daughters must be forced to become shareholders so they start again making decisions as if it were their own company. instead of someone else’s company.

“Because of the almost complete lack of oversight by our government regulators, who have crawled into bed with these sinners, entirely too many execs have little or no equity, nil risk and yet they get huge bonuses. Why? Because their bonuses are based on revenue performance rather than profits, the old bottom line results.”

This reminded me of my dad taking home at the end of the year was left over when all the bills and workers and subs were paid. Yet the bankers apparently don’t have to worry about income, just sales.

“Don’t you see, D.D.? This explains how the recently departed CEO of AIG received millions in bonuses and Merrill Lynch execs received massive bonuses just prior to it failing and being sold.

“We need to change regulations such that execs are compensated on the basis of ‘This is my company and I will do well if my company does well.’ Today, the compensation is weighted toward selling product regardless of the cost or profit margin. It’s based on volume, not value.

“We need to return Corporate America back to the principle of rewarding executives for success and firing them for failure.”

“Gus, it’s time for dinner! Leave that poor man alone,” Shirley intervened.

“I’m coming! Don’t give up, D.D.!” He rang off.

I switched on the game. Halftime. The bad guys were winning again. They had a great offense, a frightening defense and a billionaire owner. And it looked like the other team had given up.