Friday, January 18, 2008

The greatest robbery ever conceived – robbery by collusion

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The greatest thefts of all time occur because:
Well thought out plans
By great minds with illegitimate interests
A perception of security
Where a pool of wealth exists
There are numerous pools of money – they lie in institutions, the capacity of banks to create money, but more often than not the prospect for mass ‘illegitimate’ transfer of wealth comes as a result of government favours. Consider that governments have often been behind the great success of business leaders:
Bankers were behind the financing of the post-WWII reconstruction
Bankers are behind the current derivatives market expansion
Corporate executives are granted a free reign to set their own pay levels
Corporate leaders are given exclusive licenses to operate a certain area of business
Corporate leaders are given grants
Corporate leaders are in a position to leverage their companies money. They have options on the upside, but no exposure on the downside – unlike shareholders. How can such benefits be considered fair?

What possible justification is there for the huge salaries that these executives are paid. There is no justification for paying them that much. They aren’t that special. Ayn Rand created in ‘Atlas Shrugged’ the symbol of the ‘producer’ who supported the world through productive capacity. Whilst such symbolism works well with novels, the reality is that executives depend on a huge team of talent. Why are the leaders so special? Does the enterprise fall apart because the leader is away. He is the leader generally because he is the best candidate – not because he is the only candidate. So where is the competition in this market? Why aren’t politicians enforcing the notion of competition? Well surprise surprise – political pay is another area lacking competition. Its not unusual in the Australian parliament for politicians to vote for pay rises in the last Xmas session of parliament. Might corporate leaders be turning a blind eye to political largesse for the sake of preserving their own? Ask yourself how many politicians end up in corporate boardrooms? Well only the leaders. But what is the boobie prize for the idiots that populate our parliaments? Well they get a generous pension for life – they just have to serve one term.
SMH reports that Wall Street CEOs “who presided over the subprime mortgage crisis awarded themselves bonuses totalling $US33.2 billion – down just 5% on the previous year. That is despite the fact that -of the major banking groups Citigroup, Merrill Lynch, JPMorgan Chase, Goldman Sachs, Bear Stearns, Morgan Stanley and Lehman Brothers - only Goldman Sachs largely avoided the risky loans which have since resulted in a financial crisis. In their defense, these 7 firms earned $US39 billion during the first half of 2007, a 41% gain over 2006, but they lost $US28 billion in the third and fourth financial quarters. Total pretax profits for the 7 firms totalled $US11 billion in 2007, less than one-fifth of the $US60 billion record set in 2006. Employee compensation (includes bonuses) accounted for 61% of the firms' revenues in 2007, up from 45% in 2006. The bulk of the earnings go to the employees working in mergers and acquisitions and in equities. They are rewarded with bigger bonuses than the employees in the fixed-income units handling mortgages. But the problem is – these staff aren’t the reason for the huge profits – it’s the boom. They don’t make these profits when equities are falling. Are they really so clever? The problem is the market actually supports high rates of pay because:
Rates are set on your ability to make money which is often not sustained and not tied to actual contribution
There is no competitive market since the executives who set junior pay rates have a vested interest in raising them to justify higher pay rates for themselves. The directors are thus in a weak position to argue for the CEO not to get more pay.
Incentive schemes reward on the upside – which in a boom is likely to be achieved – but don’t penalize on the downside
Often huge bonuses don’t reflect sustainable earnings, but rather the benefits of consolidation mergers & acquisitions. Of course its easy to buy the market to increase earnings in a boom. CEOs don’t have to live with the downside – the premium paid for these assets. But they make sense in the short run.

- Andrew Sheldon
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