A Labor Call for a Stock Option Ban

THIS WEEK
We can’t “afford” a lot of things these days. We can’t afford enough teachers to keep class sizes reasonably low. We can’t afford libraries. And we can’t afford,says a new United Nations report, the cost of fighting AIDS. The world is currently spending $16 billion a year helping HIV-infected people. That cost will likely hit $35 billion two decades from now, and that sum, United Nations analysts believe, will be “wholly unsustainable.” Strong words. Wrong words. In the world today, we have more than enough capacity to keep AIDS at bay. How much more? The world’s millionaires, says a new financial industry Global Wealth report released last week, are now sitting on $47.4 trillion in stocks, bonds, and other investments. A mere one-tenth of 1 percent tax levy on these assets would raise $47.4 billion a year. We have more on the new high-finance Global Wealth report — and our global wherewithal to achieve great deeds — in this week’s Too Much.
GREED AT A GLANCE
Housing prices in the United States, we learned last week, dropped another 4.2 percent in 2011’s first quarter. Among the home-sellers feeling the pain: real estate mogul Frederick Webha. Last June Webha put his nine-bedroom Beverly Hill “dream house” up for sale at $68 million. The current asking price for the still unsold house one year later: $55 million. Webha can't be too happy about that. The manse cost him $65 million to build. Those millions certainly do show. Webha’s Sunset Boulevard abode sports 15-pound gold-plated doorknobs, notesone press report, and a sculpted relief over the front door “so detailed” that visitors can clearly make out the “toenails of the angels in the carving.”   Ten years ago, billionaire Larry Ellison, the Oracle software CEO, won the right to fly his private jet into a local Silicon Valley airport any time of day — or night — he wanted, outraging a local community that wanted to see an anti-noise curfew enforced on everybody, even billionaires. Last week, Ellison won again. Neighbors down the hill from an Ellison-owned mansion overlooking San Francisco Bay — one of his six personal residences — agreed, out of court, to cut three redwoods that that were blocking Ellison’s bay view. Ellison had sued the neighbors last June after they refused his $15 million offer to buy their property. At one point in the dispute, Ellison’s neighbors caught three tree-cutters in their yard preparing to shear their redwoods without permission. Ellison, in a deposition this past April, denied any role in that foiled assault. Said Ellison: “I don't do things like that. I'm a public figure.” Last week brought some tough talk against America’s overly avaricious top executives, and their apologists, from two surprising sources: a former Ronald Reagan domestic policy adviser and the veteran CEO of a $68-billion regional U.S. bank. That CEO, M&T Bank’s Robert Wilmers, charged in an interview that overpaid executives have turned American banking into a “virtual casino” that no longer services the needs of average Americans. Former Reagan aide Bruce Bartlett, meanwhile, blasted GOP leaders in Congress for asserting, without evidence, “that cutting taxes for the well-to-do and big corporations” will solve what ails America. In truth, says Bartlett, federal taxes on corporations and the rich remain “very low,” and we have “no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.” Haute couture, at the nation’s toniest high schools, has invaded the senior prom circuit. Top-tier designers, says Teen Vogue’s Jane Keltner de Valle, are now “catering to the aesthetics of teenagers” with gowns that can top four figures. At a top Chicago private school prom, the New York Times reports, one teen this spring wore “a chartreuse Roland Mouret gown with purple snakeskin YSL Tribute sandals” for her prom proper and “a white Herve Leger dress with silver heels by Azzedine Alaïa” for her prom after-party. For prom-goers who may be somewhat financially challenged, a new rental service has come to the rescue. Rent the Runway has a $2,500 pink strapless Matthew Williamson for just $250 . . . Starting this month, speculators in Taiwan will be paying a “luxury” tax of up to 15 percent every time they flip a property they've owned for less than two years. And new luxury taxes, also effective June 1, are now hitting Taiwanese buyers of yachts and high-end autos. Taiwan president Ma Ying-jeou is counting on these new taxes to help him win re-election next year. But Ma’s critics want to see much more done to combat Taiwan’s rising inequality. Many Taiwanese, says Davidson political scientist Shelley Rigger, consider widening income gaps a “betrayal” of Taiwan’s “deep ethic of egalitarianism.” Growth with equality, she adds, has been “the hallmark of the Taiwan miracle,” and Taiwanese feel “that everyone sacrificed together for sixty years so that they could enjoy a higher standard of living together.”
INEQUALITY BY THE NUMBERS
IN FOCUS
A Call from Labor: Ban Big Bank Stock Options Federal agencies are now preparing new regs for enforcing the banker pay reforms enacted last summer. These new regs, says the AFL-CIO, need to prohibit the 'incentive' that's still stuffing bankers with billions. If you wear a power suit to work every day, you probably don't care all that much about your salary — because most of your income doesn't come from salary. Most comes from something called “incentive-based compensation.” This “incentive-based” pay can come in many forms. You can get cash as an incentive if you meet certain “performance” goals. You can get actual shares of stock as a incentive. Or, maybe best of all, you can get stock options. Stock options, in today’s corporate and banking world, essentially serve as lottery tickets for big-time executives. Lottery tickets with a difference. The first difference: These executive lottery tickets come free. Executives pay nothing to get them. The second: This executive lottery pays off big — and often. Regular folks who play the lottery can, of course, certainly hit the jackpot. But the odds against scoring a major windfall can routinely run up to 76 million-to-one, the equivalent of throwing heads on 26 consecutive coin tosses. Financial industry execs who play the stock option lottery don’t have to toss 26 heads in a row to score big. They merely have to jack up their share price. And they’ve become quite adept at doing just that, by any means necessary. Those means, we’ve learned from various investigations into the 2008 financial industry meltdown, have included everything from bankrolling subprime loan scams to cheating their own clients. Why do top execs take all these risks? With stock options, executives simply have no incentive not to take risks. Stock options give executives the “option” to purchase a specified number of their firm’s shares, at the current share price, at some future date. At that future date, if the shares have jumped in price, the executives “exercise” their options. They buy shares at the old price and then sell them off at the new one. If their firm’s shares should decline in value over time, the executives lose nothing — since they’ve paid nothing for their options. But their gains, on the upside, have no limit. The higher a share price rises, for whatever reason, the bigger the executive personal profit from exercising the option. These personal profits have been — and continue to be — enormous. Consider the power-suited executive phalanx at Goldman Sachs. Since 1999, the New York Times reported earlier this year, some 860 top Goldman execs have cashed out $20 billion from selling off shares from their personal stock stashes. Those shares came, in part, from option grants. In 2007, for instance, Goldman's board approved grants that gave execs options to purchase 3.5 million shares. But then came the 2008 meltdown, and Goldman shares plummeted in value. Goldman’s response: more options. Lots more. In December 2008, with Goldman shares trading at record lows, the bank’s top execs received nearly 36 million stock options, ten times the previous year’s total. Goldman’s top execs also received, at about that same time, a massive bailout from Uncle Sam that saved the bank from collapse and set the stage for a robust share price recovery. By January 2011, the bank’s top 475 execs could look forward to $2.7 billion in personal profits from the 2008 stock option grant. Last summer, members of Congress took a stab at curbing such grossexcesses. The Dodd-Frank financial reform legislation they passed includes a section that expressly prohibits “any type of incentive-based compensation” that “encourages inappropriate risks by providing excessive compensation.” But this section 956 leaves the enforcement specifics up to the seven federal agencies that monitor the financial sector. This past March, these seven proposeddraft regulations for implementing the lawmaker intent. Bank lobbyists and public interest groups have been sparring over these draft regs ever since. Much of the debate has revolved around a proposed regulatory rule that would require big banks to defer 50 percent of incentive compensation for a minimum of three years. The goal: to prevent executives from enriching themselves with short-term moves that end up wreaking long-term havoc. Public interest groups like Americans for Financial Reform and Public Citizen are pushing for rules that require banks to defer a greater share of executive incentive pay — and for a longer deferral period. They’re also pushing for a clearer — and tougher — definition of “excessive compensation.” The AFL-CIO, America’s biggest union federation, is pushing for even stiffer changes. Last Tuesday, the AFL-CIO’s top investment analyst, Daniel Pedrotty, asked regulators to place an outright ban on all big bank stock option incentives. “Stock options promise executives all of the benefits of share price increases with none of the risk of share price declines,” noted Pedrotty. “In other words, stock options provide executives with asymmetric incentives to shoot for the moon.” Options, he continued, also let top execs “inappropriately profit from share price volatility without creating additional value.” The AFL-CIO bottom line: Stock options don’t rate “as an appropriate form of compensation for executives and should be prohibited.” Mary Jo Carey would likely agree with this AFL-CIO appraisal. Before the 2008 financial collapse, she worked as a loan officer with a small brokerage firm in her Taos, New Mexico hometown. Carey recently sent the Securities and Exchange Commission a letter asking for tough restraints on Wall Street's “outrageous pay practices,” one of thousands of citizen letters the agency has received. “Currently, most bankers receive stock options,” Carey wrote. “So if they can generate more profits, the stock price goes up, and their options become more valuable. This is insane! This will just cause another collapse.” “I watch the revolts in Egypt, Tunisia, etc. and think,” Carey added, “that will be us someday. We are run by rich guys.” How much those rich guys get their way on Section 956 will soon be apparent. The SEC and other involved federal regulatory agencies could be adopting final regs on financial institution executive incentive pay as early as this August.
IN REVIEW
The Millionaire Roll Showing No Slowing Boston Consulting Group, Global Wealth: Shaping a New Tomorrow. May 31, 3011. “2010 was a damn good year,” Monish Kumar, a senior partner at the Boston Consulting Group, told reporters last week, “for global wealth.” Kumar misspoke. Last year, he should have said, amounted to a mighty fine year for the global wealthy. These wealthy — households worth over $1 million, not counting residences, luxury goods, or personally owned businesses — increased their share of global wealth in 2010 from 37 to 39 percent, or so the Boston Consulting Group calculates in its newly released 11th annual Global Wealth report. Net-worth millionaires now make up 0.9 percent of the world’s households. They entered this year, all together, with $47.4 trillion in investible wealth. On average, these millionaire household had $3.8 million to invest in 2010. Millionaire households actually make up significantly less than that 0.9 percent of the world. The Boston Consulting Group calculations only cover 62 nations. These nations do account for over 98 percent of global domestic product. But they don’t include many populous but desperately poor countries. The Boston Consulting Group numbers do include this year, for the first time ever, a country-by-country breakdown of the super rich, those households that hold at least $100 million in “assets under management.” The United States boasts 2,692 of these households, far more than any other nation in the world. The United States also tops the world, once again this year, in total millionaire households, with 5.22 million, about 42 percent of the global count.   The most remarkable stat in the new Boston Consulting Group Global Wealthreport? Maybe this: Total world wealth as the Boston Consulting Group defines it — that’s cash deposits, money market funds, stocks and bonds, among other onshore and offshore assets — has now jumped $10 trillion over the 2007 pre-Great Recession wealth level, the previous all-time record. We have, in other words, never been as wealthy as a human race as we are now. Yet governments the world over are pleading poverty and imposing austerity on their people. No mystery in that paradox. Just beaucoup heaps of inequality.

Quote of the Week

“In the 1960s and 1970s the highest marginal rate was around 70 percent. Even after exploiting all possible deductions and credits, the typical high-income taxpayer paid a marginal federal tax of over 50 percent. But contrary to what conservative commentators had predicted, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity and fuel growth.”
Robert Reich, former U.S. secretary of Labor, The Truth About the American Economy, June 1, 2011

Stat of the Week

This June 7 marks the tenth anniversary of George W. Bush's first tax cut. Over the last decade, the Economic Policy Institute points out in an anniversary analysis, the federal government has spent over $400 billion on increased interest to finance the debt the Bush tax cuts created. These cuts last year saved America’s top 0.1 percent — taxpayers making over $3 million — an average of $520,000 each.

New Wisdom
on Wealth

John David, We must tax the rich, Charleston Gazette, May 30, 2011. One reason: In West Virginia, one of the nation's poorest states, wealthy racehorse owners take in $100 million a year in taxpayer subsidies.

Citizens for Tax Justice, The Bush Tax Cuts After Ten Years, June 3, 2011. A state-by-state breakdown on the impact of the Bush tax cuts on their tenth anniversary. Overall, in 2013, 47.2 percent of the benefits from the cuts will go to the richest 5 percent of taxpayers.

Rasmussen Reports, 64% Say Government Hasn’t Been Tough Enough On Wall Street, June 1, 2011. And pollsters also find that 51 percent of Americans feel federal officials care more about “making Wall Street firms profitable than making sure the U.S. financial system works well for all Americans,” up from 38 percent last June.

Chuck Collins, iHate Tax Dodgers Like Apple Computer, Common Dreams, June 1, 2011. The unfairness of having individual taxpayers and small businesses “pick up the slack for tax shufflers like Apple.”

Nicholas Kristof, Our Fantasy Nation? New York Times, June 5, 2011. The United States is ever more resembling those deeply unequal developing nations where the rich, instead of paying taxes, hire guards for their gated communities, run their own generators for electricity, and send their kids to elite private schools.