Feinberg: Striking the First Blow
In New York, the rich are part of the landscape. One doesn’t pay too much attention to their excesses; in fact, it provides a little vicarious joy. You might think that seeing them leave the Park Avenue buildings where you’ll never live to enter the limo you’ll never ride in to go to the restaurant you’ll never dine in might provoke some envy, but that’s seldom the case. People don’t begrudge other people’s success, but they do want two things: one, a fair amount for themselves, and two, the sense that sometime, somewhere, the money was fairly earned.
Looking at executive compensation in the last decade, it’s hard to make the case that the money was earned. Among the strongest impressions from House of Cards, William Cohan’s excellent account of the fall of Bear Stearns, are his stories about how richly the Chairman of Bear Stearns, Jimmy Cayne, was compensated, and, at the same time, how little he worked and how little he knew about his company. Cayne, who was paid multiple millions and whose net worth at one time topped $1 billion, was [and is] a champion bridge player who took off days at a time–periods when he was incommunicado–to play in tournaments. He would also do things like commandeer the company helicopter to fly him from Manhattan to his country club in New Jersey so he could play 18 holes of golf on a weekday afternoon. Meanwhile, he had no knowledge of the derivatives and the credit default swaps that led to massive overleveraging that caused his company’s abrupt collapse.
When you read things like that, you realize that Jimmy Cayne was paid, but that he didn’t earn. He, and his colleagues, and people like them at other investment banks, were simply borrowing against their assets, perhaps as much as thirty times over, and rewarding themselves by grabbing fistfuls of what seemed like the profits. And executives at other companies followed their example. jack Welch, the CEO of GE, ostensibly one of the best managed companies in the world, negotiated a retirement package that not only provided him a lavish pension, an apartment, premium health insurance, and season tickets to the Yankees and Red Sox–it also paid for his postage stamps! But hey–everybody was doing it.
Yesterday we learned that perhaps the process of bringing that insanity to an end has begun. We learned that pay czar Ken Feinberg intends to cut salaries of the 175 top executives at the companies that received government assistance by as much as half. The question today is whether this is going to be an isolated brick chucked at a palace window, or the first step in the storming of the gate.
The argument that has been floated all year, ever since the AIG bonus outrage, is that if you cut compensation at a firm, you will initiate a talent exodus, and place the firm at a competitive disadvantage. This could be a very good thing. Too much of the economy is lodged in the financial sector, and too much of finance is taken up with alchemy like credit default swaps. Too many brains have been working at hedge funds, places not where investments are made but where markets are played and manipulated (as onetime hotshot hedge fund operator Jim Cramer unembarrassingly acknowledged.) So yeah, let’s drain some of the money out of this system. Let’s make the game less lucrative. Let’s see some of the fine young minds that are cramming into the business majors at the Ivies go into something else. Maybe one of them could go into research and find a cure for cancer. Or do something really worthwhile, and find a formula that would help news organizations make money on the web.
The point is, the Free Market ideology which dominated the country since the the 1980s may or may not have unleashed a spirit of entrepreneurial creativity that benefited society at large (though it’s hard to argue that it did, what with salaries being essentially unchanged in two decades.) But what it indisputably unleashed is an era of financial manipulation, financial cleverness, in which massive amounts of compensation is paid to people who inflate quarterly profits that may not endure through the next quarter, who fraudulently pad real estate values that underwrite undeserved mortgages, who pack boards of directors with malleable cronies, who labor to devise ways to wring risk from transactions that are not risky but actually dishonest. Feinberg’s ruling is a useful step in preventing the next Jimmy Cayne, but it’s just the first of many that will be needed. We need to restore the sense that there is a real relationship between having money and having earned it.