Rescuing capitalism from Wall Street
The Washington Post, April 8, 2010
At what point does the ubiquity of the undeserving rich become so corrosive in a democracy that it sparks a backlash that wrongly discredits capitalism altogether?
That's my question for Bob Rubin and Charles Prince, both formerly of Citigroup, when they testify before the Financial Crisis Inquiry Commission on Thursday. Though first I'd put it this way: How'd you guys make so much money running Citigroup into the ground and leaving it a ward of the state?
Prince earned at least $120 million for running Citi for four years, during which time $64 billion in market value vanished. Rubin made at least $115 million (plus stock options) between 1999 and 2008, before the feds had to inject $45 billion and then guarantee $300 billion of the firm's liabilities to keep the place afloat.
Rubin told the Wall Street Journal
in November 2008 that he was worth every pennyand then some. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.
This sense of entitlement to the lucre from rigged compensation systems seems to pervade finance: Ken Lewis of Bank of America, Stan O'Neal of Merrill Lynch and Kerry Killinger of Washington Mutual (to name just three) walked away from the ruins as very rich men. This pattern explains much about the crisis that wrecked our banks, left 15 million people unemployed, vaporized trillions in output, saddled government with crushing debt and shredded America's economic credibility. (I was in Shanghai last week, and trust me, the Chinese are happy to copy our DVDs, but they don't view American-style capitalism as a model just now.)
At least Akio Toyoda apologized. Our masters of the universe feel exempt from accountability or shame. The toxic mind-set of American financiers has emerged unscathed from the toxic assets they unleashed. Being Bob Rubin means never having to say you're sorry.
The mystery of the financial crisis is this: How could problems in a relatively small class of assets, such as subprime mortgages, bring down the economy? Losses on the trillion or so dollars of subprime loans reached perhaps $300 billion. How could that sum threaten a $15 trillion economy that's fifty times larger? Let alone a global economy of $60 trillion? On its face, this calamity shouldn't have been possible.
So why was it? A big part of the answer is that this small poison in the system spread because of side bets and leverage. New sectors of "derivative" finance, whose sole purpose was to gamble on the fates of these loans, sprang up. Supposedly savvy institutions borrowed big time to make these bets. It's important to be clear on this: Borrowing heavily to go to the casinoan activity normally scorned by decent peopleis the way Wall Street's "best and brightest" did their work.
Meanwhile, the ratings agencies meant to judge the soundness of the loans that backed these bets were too sleepy, lazy or compromised by the profits they made selling their seal of approval to do their job.
Beyond these shenanigans lies the real heart of darkness: the fact that a few thousand senior people across Wall Street could remain (or get) very wealthy even if the house of cards collapsed. And this, in turn, was possible only because of pay practices that showered bonuses right away even if the mortgage-backed securities on which these bonuses were based were fated to implodeand because the public ownership structure of major firms meant that all the borrowing and bets were done with other people's money. Wall Street's old privately owned investment partnerships would never have wagered their net worth on so much risky junk.
In "The Big Short," a brilliant look at the crisis through the eyes of quirky, farsighted investors who bet against the conventional madness, Michael Lewis observes that the problem was the system of incentives that channeled Wall Street's workaday greed. "What's strange," Lewis says, "is that pretty much all the important people on both sides of the gamble left the table rich."
"The CEOs of every major Wall Street firm . . . were on the wrong end of the gamble," Lewis writes, of the subprime implosion. "All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too."
This is not how free markets are supposed to work. This is the scam the Angelides commission and Congress have to scream aboutand fix. If you believe (as I do) that intelligently regulated market capitalism is the best hope for spreading prosperity, it's essential to rescue the U.S. economy from Wall Street's "heads-I-win-tails-you-lose" perversion that threatens to discredit America's model altogether.