By Roberto Savio*
Rome, mar. 2013 – For those who think that Occupy Wall Street, the indignados in Spain, the World Social Forum and the hundreds manifestation of protest worldwide are expressions without concrete outcome, the result of the recent Swiss referendum (Sunday 3 March) on capping the salaries and bonuses of banks executives should make them think twice.
Like it or not, two-thirds of the Swiss, who are not exactly a revolutionary people, have given the shareholders of financial institutions the right to decide salaries and bonuses of their executives, which is thus no longer to the cosy mutual enrichment of their boards, and another referendum is due shortly on limiting the salaries and bonuses of executives of companies of all sectors to a figure that does not exceed 15 times that of the average salary of their employees.
Towards the end of February, the European Union took a major step towards capping the bonuses paid to bankers at no more than equal to their annual salaries, starting next year. Only if a bank’s shareholders so decided could a bonus be higher, and even then it would be limited to no more than double the salary.
These are interesting developments if one considers that back in 1950, U.S. financial manager Bernard Baruch theorised on the possibility that executive could have salaries 50 times higher than that of the average of their employees, giving rise to a huge scandal – today, according to the Fortune 500 list of the most important companies, that difference has grown to 545 times.
The howling of bankers, while expected, is very interesting from the point of view of the reason for their rejection.
The first, basically from the United Kingdom, is that such limits would increase the gap between London and Europe. The financial sectors account for 10 percent of the British gross national product (GNP), and the Anglo-Saxon world has been riding the waves of increases in the bonuses and salaries of bankers much more than elsewhere – in a good year, a bonus can be 10 times higher than a salary. As the last local elections showed, the United Kingdom is anyhow moving towards an increasing anti-European sentiment, and Europe will never become more integrated with the brakes that London continues to apply. So the financial sector is not the main issue.
The second reason for rejection is more interesting. It is argued that the result will be higher fixed salaries which would hurt more shareholders, and high bonuses which are more flexible. The result would be that good executives would move to Wall Street, or Hong Kong, Shanghai or Tokyo, and Europe would be left with second-class executives.
Now, it is widely known that high bonuses reward risk-taking, which is one of the causes of the dismal performances of the banking system, and this argument ignores that there is a growing consensus on the need to go back to the pre-Clinton era, when deposit banks and investment banks were separate (and there was not such a dramatic crisis as at present) precisely in order to reduce the high-risk culture which has led to a system that has increased unemployment and poverty worldwide – suffice it to note the unremitting cascades of fines for frauds and mismanagement that banks have had to pay since the ill-fated Clinton decision to repeal the Bank Holding Company Act paving the way for the creation of mammoth ‘too big to fail’ banks that played a role in encouraging reckless risk-taking.
The third argument is the most interesting, and show how much the world of banking has grown into its own delusion. Bonuses are mostly given in the form of a “clawback” bonus”; they are deferred and often paid in the form of stocks, and they can be retracted. The big banks, like the Royal Bank of Scotland and Barclays, have used clawbacks, and bankers say that this threat has itself become a powerful deterrent to risky or unethical behaviour.
No data are available on how much this clawback mechanism has been used anywhere, but what is known is the innumerable amount of fines that have been applied to the big banks for fraud – the very lenient U.S. regulators alone have imposed more than three billion dollars in fines on the big banks.
Let us just recall some of what are considered by the experts as a “slap on the wrist”: 8.5 billion for fraudulent foreclosures on home loans imposed ten banks ( including Bank of America, Citigroup and JP Morgan Chase), followed by a 557 million dollars settlement involving Goldman Sachs and Morgan Stanley. To date, fraudulent fixing of the Libor rate (the rate of exchange among banks) has cost just the UBS 1.5 billion dollars. The chief executive of Barclays has been obliged to resign. Where is the effect of the clawback cause as a firewall against risky and unethical behaviour?
British authorities have now recommended regular oversight of Libor, as well criminal charges against individuals trying to alter the rate for financial gain. HSBC has recognised that it has been laundering money from the drug cartels of Mexico and Saudi banks with ties to terrorists groups.
Nonetheless, on 5 March, just two days after the Swiss referendum, and all the scandals in which it was involved which have cost more than 4 billion dollars in fines and settlement, the HSBC board decided to award its 200 super managers a bonus of one million pounds. Of course, there has been a chorus of criticism in London, but this is one of the best examples of the isolation of bankers from reality. HSBC lost 5.6% in 2012, but its CEO Stuart Gulliver has been rewarded with a bonus of 11 million dollars.
The best way to understand how bankers have cultivated a different mind-set has been offered by the CEO of JP Morgan, the famous Jamie Dimon, defender of the banking system who attacked everybody at the World Economic Forum in January (“until when you will criticise bankers?”) and who, in a debate with well-known analyst Mike Mayo at the yearly meeting with JP Morgan investors few days ago in New York, gave as his concluding answer: “This is the reason why I am richer than you”.
So it should not come as any surprise that Maurice Greenberg, the CEO of AIG, has now opened a suit for 25 billion dollars against the government, accusing it of “extracting” a punitive interest of 14 percent in the bailout plan which saved AIG from bankruptcy. The government had to inject 182 billion dollars to save AIG, one of the largest mortgage insurers, after the U.S. housing bubble exploded in 2008. Let us recall that this was the beginning of the Wall Street crash, which was the detonator of the present world financial crisis, which has created 100 million new poor worldwide, according to the United Nations. That crisis, , which was entirely engineered in United States, coupled two years later with the sovereign debt crisis, an entirely European affair. This led to the unprecedented blackmail of governments by the market, to the uniform medicine of austerity, with Greece as the clearest example of its impact on people.
Greenberg resigned without any punishment, and is now asking 25 billion dollars for the harsh conditions imposed by the government to save AIG!
This represents well the relations between the authorities and the financial system. We have the certifying companies who certified that AIG and Goldman Sachs were sound institutions: the same companies that now give a triple A or not to governments, in spite the fact that they looked the other way. And the regulators?
By and large, the philosophy of the Securities and Exchange Commission (SEC), the U.S. regulatory authority, goes as follows: let us settle cases against financial wrongdoing without admitting them or denying the findings. This practice, it argues, helps the SEC and other agencies avoid costly, time-consuming litigation. Quick settlements, rather than long trials, mean victims obtain restitution faster. And there is always the possibility that the SEC could lose in court.
Here is a good example of the issue, and a very complex affair: for the full story, go to page 18 of the New York Times of 19 February. In a nutshell, AIG sued the Bank of America for fraud, for 10 billion dollars, related to the days of September 2008 when AIG was close to death. The case went to court. And then, the Federal Reserve Bank (from which the former Treasury Secretary Timothy Geithner came) , made a deal with Bank of America for a settlement of 43 million dollars, giving statements to the court that exonerated Bank of America in the case. A spokesman said that the Federal Reserve supported the settlement because it would generate significant value without potentially high litigation costs.
In the same New York Times, Jesse Elsinger of ProPublica, a non-profit news agency, published an amusing, but discomforting story on the revolving doors for regulators at all levels. It starts with Mary Jo White who was appointed by President Barack Obama as the head of SEC. She has spent the last decade serving so many banks and investments house that she will have to refuse involving herself in so many cases, and will be able to litigate only with minor entities, such as First Wauwatosa Securities. And now, Senator Reid, the Democrat majority leader of the Senate, has taken into his staff Cathy Koch as chief adviser for tax and economic policies. She comes from General Electric which, under her expertise, paid almost no taxes.
The U.S. Office of the Comptroller of Currency (OCC) has a new boss, Thomas Curry, less linked
to large banks, and he fired the outgoing chief counsel, Julie Williams, who promptly landed at Promontory Financial, a shadow OCC of the private sector, founded by a former head of the agency, Eugene A. Ludwig. Promontory provided the bulk of the staff for the Independent Foreclosure Review (IFR) that the SEC and other regulators set up to evaluate how the big 10 banks played a role in defining an action on how to compensate the victims of the housing bubble.
Their idea was to let the bank establish the facts. Result: before the settlement for 8.5 billion dollars that we cited earlier, the IFR had to be disbanded, because it failed to come up with any result, but not before paying 1.5 billion dollars to the consultants. And who replaced Julie Williams as chief counsel at the OCC? Amy Friend, who comes from Promontory Financial…
Now we have a new Treasury Secretary, Jacob ‘Jack’ Lew, and in the vote for Lew’s approval by the Senate, what did Bernie Sanders, an independent from Vermont, declare: “We need a Treasury Secretary who is prepared to stand up to the enormous power of Wall Street. Do I believe that Jack Lew is that person? No, I do not”.
The problem is that the private sector is increasingly mimicking the financial sector. When Don Bailey took over Questcor Pharmaceuticals, he raised the price of a specialised anti-inflammatory drug, Achtar, from 50 to 28,000 dollars a vial. When asked if the price could not come down for those who could not afford it, Bailey answered: ”If I do this, I can be sued by the shareholders for limiting their gains”.
It is therefore appropriate that a new training programme has been started in U.S. prisons: the Prison Entrepreneurship Program, which has already graduated 800 convicted felons. It is a six-month course run by former executives and voluntary MBA students, and it teaches how to start a business and run it. It has over 2,500 applicants every year for just 150 places. It is a success story. Graduates do so well in the business world that only 5 percent return to prison. Maybe it should plug into the revolving door system that has just been described.
But more obscene is the news that in 2012, the world’s 100 richest people ADDED 240 billion dollars to their wealth. Clearly, in human terms, they had no need of that money. The top 1 percent of the world population (60 million) now has a wealth equal to 2 and half billion people. And in the last ten years, this concentration has become even more extreme. The top 0.01 percent (600,000 people) have a wealth equal to two billion people and there are now 1,200 billionaires in the world.
At the same time, we are facing a serious food problem. Every day there are 219,000 new mouths to feed every day, 70 million every year. According to the UN Food and Agriculture Organization (FAO), the world’s reserves have gone down by 2.6 percent, while the cost of food keeps going up (cereals by 10% to 35%, depending on the product). Yet, according to the World Bank, we throw away 40 percent of food in the rich countries. With the 240 billion piled up in a year by those 100 richest people, we could eliminate many of the world problems…
Anyhow, 2 billion more people are expected by 2050. The system is not able to accommodate our current 7 billion, how will it accommodate 2 billion more, coming from the poorest parts of the planet? Well, the answer is obvious: we have the wealth, but it is not distributed justly. And, as everybody says, the rich become richer, and the poor poorer.
To go back to the beginning of this article, too short to be serious, people are getting fed up, as the Swiss referendum has clearly shown. But it is not just Switzerland, it is everywhere, with discontent seeping into the polls, and protest parties flourishing everywhere. Beppe Grillo, in Italy, is just the latest warning sign. We are in transition to a different system. This can be done in peace and cooperation, or by continuing in growing social injustice. History has many lessons on this issue, and it is useless to recall them; we all read them at school, as did the 100 billionaires. What the Swiss referendum shows is not that the awareness is not there – what is lacking is our political representation.