Risk, Disaster, and Wall Street Windfalls

[marmar]

from Too Much: A Commentary on Excess and Inequality:



Risk, Disaster, and
Wall Street Windfalls
Excessive rewards for top executives, most analysts seem to agree, help explain why Bear Stearns — and Wall Street — have gone so flamingly wrong. But analysts are still shying from an obvious answer for setting things right.
March 24, 2008

By Sam Pizzigati

Nero fiddled while Rome burned. James Cayne, the chairman of investment banking giant Bear Stearns, would have played bridge. In fact, earlier this month, with Bear Stearns about to go up in flames, the 74-year-old Cayne did play bridge — at a national tournament in Detroit.

Cayne could afford to be somewhat nonchalant about his company’s future. His future will forever be secure. As Bear Stearns CEO — he stepped down this past January — Cayne pocketed over $232 million in compensation.

What did Cayne do to earn that excessive sum? He helped create what Nobel Prize-winning economist Joseph Stiglitz last week called “the worst financial problem we've had since the Great Depression.”

America’s top business journalists spent their last week trying to explain just how that problem evolved. By week’s end, a consensus of sorts had emerged. Wall Street investment houses, analysts seemed to agree, had routinely flouted prudent business practices. They had followed, as Fortune magazine charged, “a highly flawed business model.”

“Put simply,” says Fortune, “Wall Street firms used towering leverage to make tons of money in a long-running bull market that blatantly underpriced risk.”

The risk should have been easy to see. Shaky subprimes made up just 17 percent of all new mortgage loans in the year 2000. By 2006, researchers at First American CoreLogic calculate, subprimes constituted almost half, 44 percent. ......(more)

The complete piece is at: http://www.cipa-apex.org/toomuch/articlenew2008/mar24a.html

[Phoebe Loosinhouse]

1. This is a topic I am passionate about.

Excessive executive pay in publicly held companies is nothing more than legalized looting - and I'm not even sure that is IS legal, because siphoning off the assets of a company to a small group individuals in such a gross distortion of what could be considered equitable compensation, is, I believe, a violation of the fiduciary duties that the executives and the Boards of Directors owe their shareholders.

Some of those highly excessive sums of money should be paid out in the form of dividends to the shareholders or to capital improvements or to R&D to keep the company profitable in the future. This has been going on ad nauseum despite a (finally) growing chorus of disapprobation. So, until the public in general recognizes the Ponzi scheme that the stock market has become, I personally am:

pulling all of my IRA's, etc. out of mutual stock funds and I am putting them into bank CD's for the short and possibly long haul.

I refuse to be played for a sucker any more. When they clean up their acts and take a reasonable wage in comparison to what the median worker is paid and take the rest in stocks in their company 401K's like the rest of us do - then maybe I'll be back.

PS - The wild daily swings in the stock market lately just show how volatile and unsound the whole thing is. It is held up not by actual production and profits, but by the ILLUSION of actual production and profits.

[marmar]

2. "but by the ILLUSION of actual production and profits."

Exactly. The whole economy is based on Enron-esque accounting tricks. And the pen is just about out of ink.