When the gods dance...

Monday, February 20, 2012

The Law of the Land?



Remember the “Twinkies defense”? Quite an urban legend has grown up around it. The 1978 killer of two beloved San Francisco city leaders won a bizarrely light sentence, the story goes, because the jury bought the defense claim that a sugar rush from a Twinkies cake sent the killer over the edge.

This week is going to see another “Twinkies defense” — from Hostess Foods, the corporation that bestows Twinkies upon us. The Hostess corporate board is going into bankruptcy court to defend its pay deal with Hostess CEO Brian Driscoll. The deal guarantees Driscoll $1.5 million in annual salary, another $2 million in “long-term incentives,” and additional “cash incentives” yet to be disclosed.

Only Driscoll, the Hostess defense insists, can put the twinkle back in Twinkies. Driscoll has a plan. What’s his plan? He wants to slash Hostess worker pension and medical benefits. And if Driscoll doesn’t get a multi-million pay guarantee, he’s not going to stick around and do that slashing.

This new Twinkies defense strike you as a bit outrageous? Check out what Corporate America, writ large, is doing to defend still soaring CEO pay from the pay curbs Congress wrote into law two years ago. We have that story — and plenty more — in this week’s Too Much.


A quarter of the world’s children — over 170 million kids under age five — are growing up “stunted,” unable “to develop properly because of malnutrition,” Save the Children reported last week. One reason: Speculative commodity trading has ratcheted up the price of basic foodstuffs. That same speculation also helps explain last year’s 29 percent increase in the net worth of global households worth at least $1 million. These households, the Credit Suisse Research Institute in Zurich documented last fall, hold less than 1 percent of the world’s population and an astounding 38.5 percent of the world’s wealth . . .

Commentators in China these days are talking about the “Ka-Ching Dynasty,” that new horde of super-rich heirs who sup at clubs where a single drink can go for a factory worker’s weekly wage. But the real global ka-chinging won’t start ringing in earnest until next July’s opening of the 2012 London Olympics. Organizers are expecting up to 40 “super yachts” to dock on the Thames, some just five miles from the Olympic stadium. Also set to be floating on the Thames: two temp hotels that will host 800 yacht security personnel. Among the bigger boats expected in London: the 536-foot Eclipse of Russia's Roman Abramovich, the 414-foot Octopus of Microsoft co-founder Paul Allen, and the 289-foot Maltese Falcon sailing yacht of Greek hedge fund mogul Elena Ambrosiadou . . .

Not every deep pocket will be yachting to the Olympics this summer. Some will be arriving in an especially fine motorcar — like the $350,000 Bentley Mulsanne. And those Bentley motorists won’t have to squint any in the bright Olympic sun. The luxury automaker is ever so thoughtfully offering purchasers of its new Mulsanne model a pair of matching sunglasses “hand-crafted from platinum” with surfaces engraved to reflect the style of a Bentley’s “interior quilted leather.” The cost of the sunglasses? Just $41,000. Included in the price: a home visit from a Bentley optician who’ll custom measure every buyer’s eyes and nose. Bentley has so far sold 25 of the customized platinum shades and another 70 of a cheaper — just $10,000 — version in 18-carat yellow, rose, or white gold.


CEOs of America, Ed Bolen has your back. So go ahead, upgrade your corporate jet to the top-of-the-line Gulfstream with those neat reclining leather seats. Don’t worry about bad press. Ed Bolen, the top exec at the National Business Aviation Association, will set any fretful public straight. He certainly did last week, after the Minneapolis Star Tribunedetailed how 3M, the Post-It giant, was spending a quarter-billion dollars to replace its five private jets with flashy new Gulfstreams — at the same time the firm was cutting back on jobs and R&D. The Star Tribune, Bolen charged in a rebuttal op-ed, had “vilified” poor 3M and offered the public no “perspective.” One piece of perspective Bolen didn't mention in his rebuttal: In 2010, 3M CEO George Buckley took $150,000 worth of free personal rides on the 3M fleet.



How Power Suits Subvert the Law of the Land

Lawmakers make laws. They don't enforce them. Corporate America understands that difference — and exploits it with a relentless regularity. The latest case in point: the battle over outrageous CEO pay.

Towers Watson, the corporate consulting powerhouse, last week shot out to clients a cheat sheet for dealing with that “unflattering headline about your company’s executive pay.”

This coming spring, the Towers Watson advisory counseled, be prepared for news articles that may “mislead the reader into thinking” that your corporate board is taking “actions that are not in shareholders’ best interests” — articles with headlines like “CEO Pay Rises Dramatically in 2011.”

The Towers Watson warning could hardly be more timely. The new annual CEO compensation reports will start appearing late next month, and all signs are pointing to another big corporate executive pay uptick, maybe as much as the36.5 percent pay hike for top 500 CEOs reported for 2010.

Few analysts had expected this latest surge in executive pay. Two years ago, after all, lawmakers in Congress had written into law a series of curbs on corporate executive pay practices, as part of the widely celebrated Dodd-Frank Wall Street Reform and Consumer Protection Act.

Dodd-Frank’s executive pay provisions give shareholders more information — and say — over executive pay decisions. And they give regulators much more authority to quash lavish incentives that encourage reckless executive behavior.

So what went wrong? Why hasn’t Dodd-Frank slowed the CEO pay spiral? Is Dodd-Frank's approach to CEO pay reform somehow fatally flawed?

No one really knows — for a simple reason. Dodd-Frank's most far-reaching CEO pay provisions still haven’t gone into effect.

Who deserves the blame for this perverse state of affairs?

Courts deserve some. Last July, for instance, a U.S. Court of Appeals panel “vacated” a new rule federal regulators had prepared to put teeth into the Dodd-Frank provision that could help dissident shareholders challenge corporate directors who rubberstamp excessive executive pay awards.

But much of the blame rests on federal regulatory agencies themselves. These agencies have been flinching, ever since Dodd-Frank's passage, under intense corporate pressure. Regulators are dragging their feet and shying away from any real exercise of the new authority Dodd-Frank gives them.

Last week, a U.S. Senate hearing flashed some light on that flinching.

The Dodd-Frank statute, Columbia Law School’s Robert Jackson told a Senate Budget subcommittee, entrusts in the Securities and Exchange Commission and other federal agencies “unprecedented authority to ensure that bonus practices never again endanger financial stability.”

Under Dodd-Frank, Jackson explained, regulators can “prohibit any bonus that gives bankers excessive pay.” But an initial set of Dodd-Frank regulations that federal agencies proposed last April, he noted, doesn’t even prohibit the most brazen of financial executive greed grabs, the “hedging” that financial executives do against their own company’s stock.

Executives hedge by placing bets in derivative markets that their firm’s share value will plummet — at the same time they’re stuffing their pockets with pay incentives to raise that value up ever higher. Hedging along these lines helped AIG insurance chief Hank Greenburg to $250 million when AIG collapsed in 2008.

On other Dodd-Frank executive pay provisions, the SEC and other federal agencies haven’t bothered to issue weak regulations. They’ve issued no regulations at all. The most glaring example: Dodd-Frank’s now infamous — in corporate circles — section 953(b).

This obscure Dodd-Frank provision, guided into law by Senator Robert Menendez from New Jersey, requires corporations to annually reveal their CEO pay, the pay of their median employee, and the ratio between the two.

Menendez had a simple goal in mind. He wanted all shareholders — and all Americans — to know how much individual CEOs make as a multiple of what their typical workers take home. Corporate boards of directors do not currently have to reveal this information

Corporate execs and lobbyists didn’t see this Menendez mandate coming. They were too busy working to water down various other elements of the pending Dodd-Frank package to notice. Now they’re mobilizing feverishly to stop the pay ratio disclosure Dodd-Frank mandates.

In the House of Representatives, these power suits have engineered Financial Services Committee approval of a bill that would repeal the Menendez mandate. But that repeal is going nowhere in the current Senate. Corporate America's plan B: Push the SEC to delay the release of the rules needed to enforce the pay ratio disclosure mandate — until the Senate changes.

Last month, 23 top national business groups — a heavy-hitter line-up that included the U.S. Chamber of Commerce and the CEO all-star Business Roundtable — sent SEC chair Mary Schapiro a letter urging the SEC to “resist rushing into proposing regulations.”

The agency has so far resisted any urge to rush quite nicely. President Obama signed Dodd-Frank into law in July 2010. The spring 2011 annual corporate meetings came and went without any pay ratio disclosure rules on the books. The spring 2012 annual meetings will come and go the same way.

And so might the spring 2013 corporate annual meeting season, since the SEC still hasn’t set any firm deadlines for getting the needed disclosure rules written.

This endless SEC footdragging has public interest watchdogs up in arms. Americans for Financial Reform, an umbrella group that includes the AFL-CIO, is calling the corporate call for more disclosure rule discussion a cynical move “to stifle the rule, not to enhance the rulemaking process.”

Lawmakers supporting pay ratio disclosure are pushing back, too. Representative Keith Ellison, a Democrat from Minnesota, last week began collecting lawmaker signatures for a letter pressing the Securities and Exchange Commission to move forward with dispatch on the ratio rule-writing process.

In 1980, notes Ellison, major U.S. CEOs averaged $624,996 in annual pay, about 42 times the pay of typical American factory workers. By 2010, big-time CEO pay had jumped to $10.8 million, or 319 times median worker compensation. 

“Section 953(b) was intended,” says Ellison, “to shine a light on figures like this at each company.”

At last week's Senate Banking subcommittee hearing, senator Sherrod Brown from Ohio stressed that protecting U.S. taxpayers must mean “putting an end to risky compensation packages that allow Wall Street to reap all the rewards when times are good, but stick taxpayers with the bill when things go bad.”

Not everyone on Capitol Hill agrees. The ranking Republican on the Senate Banking subcommittee that Sherrod Brown chairs, Senator Bob Corker from Tennessee, is feeling no angst about the nonexistent enforcement of Dodd-Frank’s most important curbs on executive pay excess.

Corker last week declared that the Dodd-Frank regulations were “working.” We have “to be careful” on executive pay, Corker added, what with “populism running rampant” and people taking “about the 1 percent and the 99 percent.”

Why do we have to be careful? Any overly enthusiastic clampdown on executive pay, Corker would go on to explain, might have our nation’s finest CEOs pick up their marbles and go someplace else. Warned Corker: “Populism can drive a lot of talent out we want to see in the system.”

The same talent, presumably, that crashed the U.S. economy.  


The Promise in the New White House Tax Plan

The President's Budget for Fiscal Year 2013. Office of Management and Budget. Washington, D.C., February 13, 2012.

Wall Street Journal columnist Daniel Henninger is calling the new budget the White House released last week “a work of literature.” He means no compliment.

Henninger and his fellow apologists for grand private fortune consider the new Obama budget a work of reprehensible public policy fiction, a blueprint for “large wealth transfers” that amount to an unconscionable tax on “national success.”

Henninger and friends need to get a grip. Those wealthy paragons of “national success” they so admire would survive quite comfortably the adoption of any or all of the Obama budget's new taxes.

Indeed, even if Congress adopted every new tax this budget advances, not one wealthy American would next year face a top-bracket tax rate higher than 39.6 percent. Back in Ronald Reagan’s first term, income in America’s top bracket faced a 50 percent tax rate. The republic survived.

So why all the squeals of anguish out of right-wing fan clubs for rich people? Is the anger over the new Obama budget just more conservative political theater?

Not really. The tax proposals in the budget plan released last week actually do signal a turn — toward more genuine tax progressivity — on the part of the Obama White House. The right seems to sense that.

We can see this new White House turn in two proposals the budget for 2013 promotes, one narrow and quite specific, the other broad and vague.

The narrow pitch addresses dividend income.

Some background: The Obama White House has always supported the eventual expiration of the 2001 and 2003 Bush tax cuts for wealthy taxpayers. But the White House, until last week, has focused only on the Bush tax cut that sliced the tax rate on top income-bracket income from 39.6 to 35 percent.

Last week, for the first time, an Obama budget acknowledged that the Bush years had also cut the tax rate on dividend income down to 15 percent, from 39.6 percent. The Obama White House had previously let this tax cut slide.

Not anymore. The new Obama budget advocates an end to preferential tax treatment on the dividend income that goes to wealthy taxpayers. Couples making over $250,000 would under this new budget face a 39.6 percent tax rate on their dividends, the same as they did in the Clinton years.

Capital gains income, on the other hand, would continue to receive preferential treatment under the new Obama budget, only less of it. America's wealthiest now pay just a 15 percent tax on the capital gains they make trading stocks and other assets, the main reason why they pay so little of their incomes in taxes.  

The Obama budget has this 15 percent capital gains tax rate rising only to 20 percent. But the new budget has a plan to offset this continuing preferential treatment for capital gains. Americans  “making over $1 million,” the budget proposes, “should pay no less than 30 percent of their income in taxes.”

The new Obama budget gives this “Buffett rule” no other specifics. This lack of detail doesn’t particularly matter one way or another right now, since Congress as currently constituted is not going to adopt the Buffett rule in any shape or form this year — and everyone on Capitol Hill knows it.

In this charged political environment, the new Obama budget essentially serves as a campaign manifesto, a declaration of where the Obama administration wants to go in a second term.

The big tax question on this declaration: Does the administration want to go far enough — toward its stated goal of “a simpler, fairer, more progressive tax system than we have today”?

The answer gets tricky. The Obama budget tax framework, if adopted, would no doubt leave the tax system significantly more progressive. A 30 percent millionaire minimum tax would all by itself have a substantial impact. In 2008, the last year with data available, the nation’s top 400 taxpayers only paid 18.2 percent of their incomes in federal income tax.

Add to this 30 percent Buffett rule the dividend tax hike and other proposals the White House reiterates in the new budget — the return to a 39.6 percent top-bracket rate, the repeal of the “carried interest” loophole that enriches hedge fund kings, a limit on the benefits the wealthy can claim from tax deductions — and the nation would have a distinctly more equitable and progressive tax code.

The effective tax rate on Americans who make over $1 million currently averagesaround 25 percent. In 2013, under the Obama budget, millionaires would likely average a federal income tax bill that equals somewhere between 30 and 35 percent of their incomes.

Not chopped liver. But not adequate either. The current White House tax vision for 2013 and beyond simply leaves too much money on the table — money the rich have siphoned off from America's 99 percent, money that could be rebuilding the American middle class.

A little history can be useful here. In 1953, the heart of our middle class golden age, taxpayers who made at least $1 million — in today’s dollars — paid far more of their incomes in federal income tax than millionaires would pay in 2013 under the new White House budget. Our 1953 rich, after taking advantage of every loophole they could find, paid taxes at nearly a 55 percent effective rate.

But we don’t have to go back 60 years to find an American rich more heavily taxed than our rich would be under the new White House budget. Just 30 years ago, after the first round of Reagan tax cuts, millionaires ended up paying, after loopholes, nearly 39 percent of their 1983 incomes in federal tax.

The 2013 budget won’t get us back to 1983, much less 1953. But the budget does move us in the right tax direction. That counts. And, besides, any tax plan that really steams our guardians of “national success” does offer pleasures aplenty.

Quote of the Week

"Almost everything we sell in Beverly Hills is $10 million or more, and it's all cash.”
Jeff Hyland, Hilton & Hyland Real Estate, Inside the high-end housing marketBBC News, February 17, 2012

Stat of the Week

Making Wall Street look almost reasonable: Top execs at Facebook took home $83 million last year. Wall Street’s highest-paying bank, JPMorgan Chase, shelled out $79 million to its top execs. Facebook top execs, notes Fortune, managed 3,200 staffers. JPMorgan top execs managed 239,831.  

New Wisdom
on Wealth

Lawrence Mishel, Working spouses cause inequality?Working Economics, February 14, 2012. Exposing the trendy right-wing claim that roots rising inequality in affluent well-off people marrying other affluent well-off people.

Beverly Gage, Radical Solutions to Economic InequalitySlate, February 15, 2012. If only Americans today thought as open-mindedly about wealth, muses this Yale historian, as we did 100 years ago.

Roger Lowenstein, Is Any CEO Worth $189,000 Per Hour?

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