by Deb Cupples | Executives' unjustified funneling of shareholder wealth to themselves -- with the rubber-stamped blessings of a company's board of directors -- is a story as old as Corporate America, itself. We saw executives at Enron, for example, take hundreds of millions in bonuses and perks before the company filed for bankruptcy protection.
A couple days ago, the New York Times reported:
"For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.
"The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.
"Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year [spread among 2,000+ employees]. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.
"But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.
"Unlike the earnings, however, the bonuses have not been reversed." (NYT)
Did I read that correctly? Merrill's stated (albeit falsely stated) after-tax earnings for 2006 were $7.5 billion, and the company's board of directors allowed executives and employees to take $5 to $6 billion (i.e., 70% - 85% of the company's after-tax earnings) in bonuses?
The bonuses were paid out as "expenses" before net earnings were calculated. Wouldn't the company have been better off if the bonus money had instead been used to pay off debts, to fund growth, , or to put money aside to cover future losses...?
The New York Times also reported:
"Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years." (NYT)
I hope the The Times is not implying that bonuses were just a drop in the bucket -- thus, executives should be allowed to keep them.
Fact: when a company is wracking up debts or losses, every $5 to $6 billion counts -- and that was just one year's bonuses (2006). We'd get a clearer picture of the situation if we knew how much in bonuses and perks Merrill's executives took in 2007, 2005, 2004, 2003, 2002, and 2001.
I don't know quite how to extrapolate, but Mr. Kim got $116 million in cash and stocks from 2001-2007. I hate to state the obvious, but that's just one guy.
Among the many irritating facets of this situation: now that the reckoning has come, a bunch of Wall Street execs are pleading ignorance -- as in, they just had no idea that all those mortgage-backed securities would lose value as the houses' (i.e., the collateral for the mortgages) declined in value due to the deflating housing bubble.
Right. When they were persuading directors to let them take millions in bonuses, they likely presented themselves as savvy, indispensable, financial geniuses with Ivy League degrees.
Now that their recklessness (to put it kindly) is haunting them -- and throwing our nation's economy into turmoil -- they want us to believe that they were just ignorant bumpkins who couldn't possibly foresee that a deflating housing bubble would necessarily drive down the value of all those mortgage-backed securities that they'd bought.
I'm not the only one who doesn't buy it:
"Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“'Compensation was flawed top to bottom,' said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. 'The whole organization was responding to distorted incentives.'
In other words, executives and other employees knowingly made bad business decisions -- choices that they knew would likely harm the company in the long run -- in order to secure short-term personal gain.
Of course bosses turned blind eyes: bosses tend to get even bigger bonuses (even based on false profits) than their underlings do.
Apparently, blind-eyed (and greedy) executives at Merrill Lynch didn't grasp that they had fiduciary duties to company shareholders. Apparently, that concept was lost on Merrill's Board of Directors, as well.
I can't help thinking of foxes and hen houses.
Incidentally, Merrill Lynch is not the only company whose executives redistributed shareholder wealth to themselves, apparently without solid justification. In 2007, Goldman Sachs paid just its top-5 execs $324 billion (most of which was in the form of bonuses).
Both Goldman Sachs and Merrill Lynch are slated to get about $10 billion each in tax dollars this year through Henry Paulson's bailout programs. Mr. Paulson, you may remember, was CEO of Goldman Sachs for 8 years before President Bush appointed him as Treasury Secretary.
I don't have enough evidence to prove it beyond a reasonable doubt, but I'm starting to suspect that many executives and directors of publicly held companies have been on a massive looting spree.
The Bush Administration just approved a $17.4 billion loan to U.S. automakers, to keep them out of bankruptcy. Ironically, Republicans in Congress are screaming bloody murder and trying to use the loans as an opportunity to bash ordinary workers.
If only said Republicans had paid more attention (since the 2001 fall of Enron) to the people who've been sucking public companies dry: the executives.
Imagine what those Republicans could have prevented (when they had control of Congress and the White House from 2001-2006) if they hadn't been so averse to regulating what corporate higher-ups do to their companies and to our nation's economy.
Memeorandum has commentary.
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