"The law may not change the heart, but it can restrain the heartless."
-- Martin Luther King
For years now, heartless people have been running many of our world's banks and investment houses, and our laws have been insufficient to restrain them. Boards of directors, CEOs, and their leadership teams created incentive systems that rewarded self-interest, impatience, and bottomless greed.
That's a deadly three-punch combo that can flatten employees, customers, and shareholders alike. And it has. So we should not be surprised to find that even as banks have toppled, even as tens of thousands of workers have lost their jobs, even as shareholders have been wiped out, and even as taxpayers are on the hook for trillions via future higher taxes or hyperinflation, the "leaders" of these organizations have continued to pay themselves obscenely. How obscenely? Despite losing $35 billion in 2008, Wall Street firms paid out $18 billion in cash bonuses!
Specific examples are more enlightening still.
Exhibit A
Washington Mutual CEO Kerry Killinger took home $88 million in the seven years preceding the collapse of the bank, which was later handed over to JPMorgan Chase (NYSE:JPM) at a 95% discount to prior highs. Killinger apparently designed a gimme-gimme culture fueled by reckless urgency and deceit. He hasn't returned a dime of his compensation.
Exhibit B
After leading AIG's (NYSE:AIG) credit-default swap unit, which lost $11 billion in one year, Joseph Cassano was allowed to keep $34 million in bonuses for the year. He was then hired for $1 million per month to consult the company on its maze of transactions. In total, Cassano was rewarded with more than $280 million for helping to destroy the world's largest insurer.
Exhibit C
During a 15-year period as CEO of Lehman Brothers, Richard Fuld lapped up hundreds of millions in rewards. That includes a $22 million retirement pay package in the year his company went under.
Exhibit D
A year ago, John Thain was given a $15 million signing bonus to take over at Merrill Lynch; in 2008, the company posted losses of $27 billion. Today, Merrill is widely considered a bankrupt subsidiary of Bank of America (NYSE:BAC). Yet this December, Thain lobbied hard to be paid a $10 million bonus. And why not? His predecessor, Stanley O'Neal, received a $160 million retirement package after posting writedowns of $8 billion in a single quarter.
Hard as it may be to believe, there is no law that mandates the return of compensation when an executive's actions destroy a corporation. There's also no law that says you can't be heartless. Being soulless isn't criminal. And having no shame isn't actionable. To take legal action, federal authorities have to prove that these and other bankers had an intent to deceive. For example, if they can prove that Thain misled Bank of America before the acquisition, or that Thain and BofA misled regulators about the condition of the bank to secure bailout money, those points would be cause for prosecution.
But in the many cases in which regulators won't be able to prove anything, we won't see orange jumpsuits on the hundreds of bankers for whom they would fit.
Hundreds? Yes, certainly. At least that many. Remember that the banking sector has wiped out its investors, is decimating companies that rely on credit, and is primarily responsible for our rising unemployment.
So what are we left with, in terms of people who may go to jail? Well, there's Bernard Madoff -- whose deceit has spanned decades -- as well as what is certainly a team of shills. Early analysis of the accounting suggests that Madoff actually executed few, if any, trades. And in a true show of heartless cruelty, when Madoff was arrested, he had $170 million set aside not for the clients he had destroyed, but for friends, family members, and select employees. His lawyer is now being paid $1,000 per hour with client capital.
The search for confidence
What the markets need now, we hear every day, is confidence. Master investor David Swensen, head of Yale's endowment, said as much on The Charlie Rose Show last week. And of course, he's right.
As we saw with the falls of Bear Stearns, Lehman Brothers, Washington Mutual, and Wachovia, lack of confidence leads to bank runs, bailouts, and bankruptcy. And when our banking system is crippled, there isn't enough confidence left for investors to fairly value even the most honorable organizations -- names such as Costco (NASDAQ:COST), Procter & Gamble (NYSE:PG), Berkshire Hathaway (NYSE:BRK-B), and Johnson & Johnson (NYSE:JNJ).
But until there are new regulations in finance, there will be no rebound in investor or consumer confidence. Until the rules for the TARP plan restrict banks from paying bonuses during the deepest recession in decades, taxpayers will not stop getting angry. Until we see clear evidence that those who destroy companies will not benefit from their actions, we will continue to suffer the consequences of moral hazard. In short, until the market system looks meritocratic and constrained by ethics, why should we expect the mainstream investor and consumer to demonstrate confidence?
