Ramesh S Arunachalam
Bernie Sanders has been repeatedly talking about income inequality that exists in America today. But along with income inequality, Bernie has also been talking about Corporate Greed and also Wall-Street greed (including its inordinately high level of compensation) and there is no better time to discuss this than just before the New York primary on April 19th (2016) and the great DEBATE of April 14th (2016)!
On 13th April 2016, I heard Bernie talk of huge (unreasonable) compensation for the top bosses amidst the striking workers of VERIZON and he is so damn right on this aspect! And there is nothing better to illustrate what Bernie is saying than the Wall-Street top management compensation greed that was seen during the years leading to the financial crisis of 2007/8. In fact, as Bernie correctly points out, this Wall-Street greed INDEED led to 2007/2008 financial crisis which has hugely impacted not only the United States of America but also other countries globally - from which, we are all still recovering!
Compensation is indeed a very sensitive and critical aspect in the governance of corporations and it becomes even more important for banks and financial intermediaries (such as those at WALL-STREET). Indeed, in my opinion, it is one factor that perhaps accelerated and/or led to the 2007/2008 financial crisis.
And there is solid evidence in support of what Bernie is saying in the form of the Financial Crisis Inquiry Commission (FCIC) Final Report[i] (Dated January 2011) which also concurs and indeed does state that compensation was one factor, among many, that contributed to the financial crisis of 2007/2008 in the United States and elsewhere! And I quote the relevant sections from the FCIC report below:
“Both before and after going public, investment banks typically paid out half their revenues in compensation. For example, Goldman Sachs spent between 44% and 49% a year between 2005 and 2008, when Morgan Stanley allotted between 46% and 59%. Merrill paid out similar percentages in 2005 and 2006, but gave 141% in 2007—a year it suffered dramatic losses.[ii]
As the scale, revenue, and profitability of the firms grew, compensation packages soared for senior executives and other key employees.
Stanley O’Neal’s package was worth more than $91 million in 2006, the last full year he was CEO of Merrill Lynch.[iii]
In 2007, Lloyd Blankfein, CEO at Goldman Sachs, received $68.5 million;[iv] Richard Fuld, CEO of Lehman Brothers, and Jamie Dimon, CEO of JPMorgan Chase, received about $34 million and $28 million, respectively.[v]
That year Wall Street paid ...in New York roughly $33 billion in year-end bonuses alone.[vi]
Total compensation for the major U.S. banks and securities firms was estimated at $137 billion.[vii]” (FCIC Report)
In effect, what was happening was that, in all these WALL-STREET firms, the focus was on the short-term performance, incentives, and compensation when, in reality the risks (which existed) were mostly, medium and/or long-term. And of course, the regulator and law/policy makers sat and watched as compensation soared way beyond acceptable levels and firms started paying as high as 50% of their revenues in compensation.
Did not the regulators and policy/law makers find it strange that: a) Goldman Sachs spent between 44% and 49% of its revenue a year on compensation (during the years 2005 to 2008); b) Morgan Stanley allotted between 46% and 59%; and c) Merrill paid out similar percentages in 2005 and 2006, and more importantly, gave as high as 141% in 2007 (a year it suffered dramatic losses).
What, on earth, were the regulators and policy/law makers doing? Just watching, I guess, even as WALL-STREET was digging NOT only its own grave but also that of many others, which came in the form of the 2007/8 financial crisis (globally) and worldwide recession!
The above are just a few instances, and I could quote many more but as we have moved through the financial crisis of 2007/2008 (and are still recovering from its aftermath), one is tempted to ask the question that Bernie Sanders has been asking all along - were there conflicts of interest that were at play?
Yes, absolutely and there were conflicts at play and that basically boils down to another issue that Bernie has been so strongly articulating in the run up to the U.S. Presidential elections – the corruption in the financing of elections!
And there is good evidence from The Financial Crisis Inquiry Commission (FCIC) report in support of what Bernie Sanders has been arguing all along and I quote (and please READ these paragraphs carefully as it has all the evidence)
“In the spring of 1996, after years of opposing repeal of Glass-Steagall, the Securities Industry Association—the trade organization of Wall Street firms such as Goldman Sachs and Merrill Lynch—changed course. Because restrictions on banks had been slowly removed during the previous decade, banks already had beachheads in securities and insurance. Despite numerous lawsuits against the Fed and the OCC, securities firms and insurance companies could not stop this piecemeal process of deregulation through agency rulings.[viii]
Edward Yingling, the CEO of the American Bankers Association (a lobbying organization), said, ‘Because we had knocked so many holes in the walls separating commercial and investment banking and insurance, we were able to aggressively enter their businesses—in some cases more aggressively than they could enter ours. So first the securities industry, then the insurance companies, and finally the agents came over and said let’s negotiate a deal and work together.’[ix]
“In 1998, Citicorp forced the issue by seeking a merger with the insurance giant Travelers to form Citigroup. The Fed approved it, citing a technical exemption to the Bank Holding Company Act,[x] but Citigroup would have to divest itself of many Travelers assets within five years unless the laws were changed. Congress had to make a decision: Was it prepared to break up the nation’s largest financial firm? Was it time to repeal the Glass-Steagall Act, once and for all?
As Congress began fashioning legislation, the banks were close at hand. In 1999, the financial sector spent $187 million lobbying at the federal level, and individuals and political action committees (PACs) in the sector donated $202 million to federal election campaigns in the 2000 election cycle.
FROM 1999 THROUGH 2008, FEDERAL LOBBYING BY THE FINANCIAL SECTOR REACHED $2.7 BILLION; CAMPAIGN DONATIONS FROM INDIVIDUALS AND PACS TOPPED $1 BILLION.[xi]
In November 1999, Congress passed and PRESIDENT CLINTON signed the Gramm-Leach-Bliley Act (GLBA), which lifted most of the remaining Glass-Steagall-era restrictions. The new law embodied many of the measures Treasury had previously advocated.[xii]
The New York Times reported that Citigroup CEO Sandy Weill hung in his office “a hunk of wood—at least 4 feet wide—etched with his portrait and the words ‘The Shatterer of Glass-Steagall.’”[xiii] (FCIC Report)
Note the fact that the FCIC, which was the statutory commission inquiring into the 2008 financial crisis strongly highlighted the FACT that PACs and Lobbying indeed played a HUGE role in the shattering of Glass-Steagall-era restrictions, which - as all of you can see - happened in November 1999, when BILL CLINTON was the President. And we all know what happened in the end as John Reed, former co-CEO of Citigroup, acknowledged to the FCIC, in hindsight,
“the compartmentalization that was created by Glass-Steagall would be a positive factor,” making less likely a “catastrophic failure” of the financial system.[xiv] (FCIC Report)
In fact, in my humble opinion, the de-regulation that happened during mid-end 1990s (including the “The Shattering of Glass-Steagall”) was a very important reason for the 2007/2008 financial crisis. Read on to get a factual account of what happened and again I quote from the FCIC report:
“We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.
More than 30 years of deregulation[xv] and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets.
In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor. ...
Changes in the regulatory system occurred in many instances as financial markets evolved. But as the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products.
It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators.
From 1999 to 2008 the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions.
What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.” (FCIC Report)
Indeed, as Bernie Sanders has been arguing, the Financial Crisis Inquiry Commission (FCIC) Final Report[xvi] (Dated January 2011) clearly suggests that this kind of (corrupt) campaign financing and lobbying is what led to lax and laissez-faire regulation, which in turn, was one of the key factors responsible for the financial crisis of 2007/2008 – from which we are all yet to recover!
Therefore, make no mistake. Bernie is absolutely right on Wall-Street and its ability to lobby, control and perhaps even manipulate POLITICIANS! And as someone who has worked globally in the financial sector (in over 29 countries) for the last 28 years, I can say this with strong conviction!
[ii] Goldman Sachs, 2006 and 2009 10-K; Morgan Stanley, 2008 10-K; Merrill Lynch, 2005 and 2008 10-K.
[iii] Merrill Lynch, “2007 Proxy Statement,” p. 38.
[iv] Goldman Sachs, “Proxy Statement for 2008 Annual Meeting of Shareholders,” March 7, 2008, p. 16: Blankfein received $600,000 base salary and a 2007 year-end bonus of $67.9 million.
[v] Lehman Brothers, “Proxy Statement for Year-end 2007,” p. 28; JP Morgan Chase, “2007 Proxy
Statement,” p. 16.
[vi] New York State Office of the State Comptroller, “New York City Securities Industry Bonus Pool,”
February 23, 2010. The bonus pool is for securities industry (NAICS 523) employees who work in New
[vii] “Banks Set for Record Pay, Top Firms on Pace to Award $145 Billion for 2009, Up 18%, WSJ Study
Finds,” WSJ.com, January 14, 2010.
[viii] Securities Industry Association v. Board of Governors of the Federal Reserve System, 627 F.Supp. 695 (D.D.C. 1986); Kathleen Day, “Reinventing the Bank; With Depression-Era Law about to Be Rewritten, the Future Remains Unclear,” Washington Post, October 31, 1999.
[ix] Edward Yingling, quoted in “The Making of a Law,” ABA Banking Journal, December 1999.
[x] Senate Lobbying Disclosure Act Database (www.senate.gov/legislative/Public_Disclosure/LDA_reports.htm); figures on employees and PACs compiled by the Center for Responsive Politics from Federal Elections Commission data.
[xi] FCIC staff computations based on data from the Center for Responsive Politics. “Financial sector” here includes insurance companies, commercial banks, securities and investment firms, finance and credit companies, accountants, savings and loan institutions, credit unions, and mortgage bankers and brokers.
[xii] U.S. Department of the Treasury, Modernizing the Financial System (February 1991); Fed Chairman Alan Greenspan, “H.R. 10, the Financial Services Competitiveness Act of 1997,” testimony before the House Committee on Banking and Financial Services, 105th Cong., 1st sess., May 22, 1997.
[xiii] Katrina Brooker, “Citi’s Creator, Alone with His Regrets,” New York Times, January 2, 2010 - http://www.nytimes.com/2010/01/03/business/economy/03weill.html?_r=0
[xiv] John Reed, interview by FCIC, March 24, 2010.
[xv] The FCIC final report came out in 2011 and thirty years refers to the period 1981-2011 I guess