Nothing Pays Like Failure

I guess none of us should be surprised, really.

At the top of the Federal Government are two miserable failures. Chimpy ran 3 businesses into the ground, traded Sammy Sosa when he ran the Texas Rangers, and as President has yet to do anything that could be pointed to as a positive accomplishment. Chimpletons may tell their fairy tales, and Chimpletons may believe their fairy tales, but all of the lies the wingtards tell the world-and themselves-won’t change one truth.

Chimpy’s VP, the trigger-happy alcoholic “Shooter” Cheney, is the guy who saddled Halliburton with a lifetime of asbestos liabilities. He’s been trying to undo that mistake since he got installed in Washington, but it doesn’t appear that he’ll ever see legislation passed that would fix what he screwed up.

In America we’ve always been told that the way to prosperity is to always do the right thing. Work hard, study hard, be honest, and good things will happen to you. Right?

Oh HELL no, that’s not right. Honesty, diligence, and intelligence apparently don’t get you squat in today’s America. However, you can be the most completely dishonest moron the business world ever produced, and you’ll be rewarded beyond your wildest dreams. The time-honored “do the right thing” fable of American prosperity has been turned completely on its head. Clearly in these times, if you want to get anywhere in the world you must do the WRONG thing. Don’t worry about how many people you may hurt, or what you might destroy-just make that quick buck. And if you’re in an executive position in an American corporation, don’t worry about getting fired later for your screwups. The chances are excellent that the retards on your Board of Directors are probably as pathologically greedy and criminally-inclined as you are. They’ll watch your back, leaving you free to bend over your shareholders, customers, and country.

This fish has surely rotted from the head down, and it’s also pretty clear that the institutions that turn out our MBAs are as rotten as our Government is. It would be pretty hard to argue that our business colleges don’t need some serious correcting, either of their curricula, their culture, or both. It is imperative that we start instilling a sense of citizenship in our MBA students, instead of teaching them to be racketeers.

Amid the mayhem on world financial markets, it is becoming clear that capitalism’s most dangerous enemies are capitalists. No one can have watched the “subprime mortgage” debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs - and they left with multimillion-dollar pay packages. Stanley O’Neal, the ex-head of Merrill, received an estimated $161 million.

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It’s not as if these CEOs weren’t compensated in all those years. If you leave your company a shambles - with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders - do you deserve a gold-plated send-off? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy.

Wall Street’s pay practices perversely encourage extreme risk-taking that can destabilize the economy. Subprime mortgage losses may simply be chapter one. Now there are signs of problems involving securities known as “credit default swaps.” Never mind the details. Concentrate on the possible fallout. If banks and investment houses sustain more losses, the nation’s credit system will be further wounded and so will the economy. The Federal Reserve cut its key overnight interest rate yesterday from 4.25 percent to 3.5 percent - a huge move - in part to shore up this wobbly credit system.

By “Wall Street,” I mean all the commercial banks, investment banks, mutual funds, hedge funds and the like that comprise the financial sector - but particularly investment banks. Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. But pay is also heavily skewed toward annual “bonuses” based on the profits that traders and bankers generate. I asked Johnson Associates, a compensation consulting firm, for typical Wall Street pay packages. The results describe “managing directors” based in New York with 10 or 15 years experience. Most would be in their 40s.

Here are estimates for 2007:

# Investment banker: $2.1 million, consisting of $275,000 in base pay plus $1.2 million in cash bonus and $625,000 in long-term bonus. (An investment banker helps firms raise capital by selling new stocks and bonds and also advises on mergers and acquisitions.)

# Bond trader: $1.5 million, with $240,000 in base pay, $975,000 in cash bonus and $310,000 in long-term bonus.

# Hedge fund manager: $1.8 million, split between a salary of $265,000 and $1.5 million bonus.

Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I’ve never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable. True, Wall Street often performs a vital function. It channels savings into productive investments. It helps provide access to capital and credit. In 2006, U.S. companies raised nearly $4 trillion through new stocks and bonds. Many financial innovations, including mortgage-backed securities, have benefited individuals and companies.

But Wall Street also frequently misallocates capital and credit. The “tech bubble” of the late 1990s was one episode. Now we have subprime mortgages. Why? Well, the herd mentality of financial crazes has a long history. But compensation practices skewed so heavily toward bonuses based on annual profits make matters worse.

Crossposted at Reconstitution