CEO Pay and the Parasite Economy

Uncle Sam bailed out a slew of financial firms under its Troubled Asset Relief Program a year ago -- but the CEOs of these corporate welfare cases haven't exactly suffered since then. As Congress begins to rumble about regulating bankers' pay, a new report from the Institute for Policy Studies chronicles the buoyant fortunes of these so-called "buyout barons." Sorry, Ayn Rand fans, but we've got a serious problem here. Many of these parasitic executives have twisted the concept of healthy self-interest into a rampant, pathetic sense of entitlement.

Cozy living under the TARP
According to the report, the top five executive officers of the 20 U.S. financial firms that have received the most bailout money received pay packages worth a total of $3.2 billion in the three years through 2008. (Yes, that includes years running up to when the bubble burst.)

Even in 2008, which we can all agree was a very bad year for these companies, those CEOs still made 37% more than CEOs elsewhere in the economy. The TARP bosses averaged $13.8 million, versus an average of $10.1 million for S&P 500 CEOs.

These individuals appear to face an even bigger payout in 2009. Arguably thanks to the government's intervention, many of these the stocks for which these executives have received options have recently soared. When even shares of hollowed-out Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) have enjoyed a recent rise for no good reason, higher stock prices are hardly a measure of real success.

Unfortunately, these CEOs rewards for failure aren't surprising. AIG (NYSE: AIG  ) -- 80% owned by Uncle Sam -- has doled out bonuses to executives for a job poorly done. Meanwhile, Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , Goldman Sachs (NYSE: GS  ) , and similar companies' need for salvation from taxpayer funds via TARP and other programs apparently hasn't led to many consequences for top executives. Goldman might be on track to pay its employees the biggest bonus payouts in its history.

It's some small consolation that top financial executives' pay dropped by about one-third in 2008. Still, given the government's monumental monetary interventions on their companies' behalf, I'm amazed they're still getting that much.

Moral hazard everywhere
I may have dubbed 2008 The Year of Moral Hazard, but it remains regrettably rampant in 2009 as well. We're no closer to a better and more reasonable view of the fundamental health of our corporations or our economy. Indeed, we may have institutionalized speculation instead. Such policies seem to reflect a growing sense of entitlement, not merit, in corporate America.

When I recently looked at the insane pay awarded to Abercrombie & Fitch's (NYSE: ANF  ) CEO, I realized that many people who'd battle unions tooth and nail would likely defend these similarly senseless and entitled pay policies for corporate top dogs. Like too many unions, these executives reduce profitability, reward suboptimal performance, and stubbornly defy the basic economic need to excel and compete in order to survive.

Government policies, however well-intentioned, could ultimately do similar damage. The White House might potentially push the Fed to regulate bankers' pay to prevent further such abuses. But the Fed may not be the best watchdog here; many people feel it sided with bankers, not citizens, during the worst of the financial crisis. And even before the crash, the Fed blithely ignored -- if not outright encouraged -- our economy's artificial growth during back-to-back asset bubbles. Somehow, I doubt the Fed's intervention is the best remedy for this mess -- at worst, it may further distort the perverse incentives hindering our system, and increase the resulting injustices.

The parasite economy
If we really want to fix the economy, we can start by letting failed companies fail. Rather than looking to Uncle Sam to impose some centralized fix, shareholders must also start holding managements and boards accountable for how poorly their companies are run. If these parasitic CEOs want to earn millions in compensation, they need to do more than simply show up.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy. Try any of our Foolish newsletters free for 30 days.


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  • Report this Comment On September 23, 2009, at 12:48 PM, deadlysaber wrote:

    Everywhere I turn, I see, read and hear how capitalism has destroyed the American economy. The political Left blames capitalism outright, while the political Right claims capitalism is the American ideal. The elitists in banking, government, academia and the media give lip-service to the idea of a free market, when they, in fact, have no use for it. The real purpose of claiming that free markets are the American ideal is to give the collectivist a scapegoat to blame for all their nefarious wealth redistribution programs. Too many of today's activists have fallen for this intentional misdirection.

    Blaming free market capitalism for our economic problems is accusing a ghost. It has been dead for a long time. It was first stabbed in the back in 1913 when the U.S. Congress passed the Federal Reserve Act and the United States Revenue Act (creating the IRS).

    The Federal Reserve Act gave a private cartel of international bankers control over the very essence of a free market; our medium of exchange, our money. This put the free market into a death spiral. Now factor in the Legal Tender Act which prohibits any form of lawful money except the Federal Reserve Note. It is this Legal Tender Law that gives the Federal Reserve bankers their money monopoly. Without this law, individual enterprise could offer alternative commodity-backed money and compete with the FRB head to head. But honest competition is not what the elitist central planners want. Well, at least our new federal money still had some value. It was backed by gold, but not for long.

    --------------------------

    Money without intelligence is like a car without a road.

    http://www.intelligentinvestingtips.com

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