America’s top bankers and CEO’s don’t have any more talent than millions of other Americans. They do have, two timely new data dumps remind us, plenty of generous friends in pivotal places.
“We Americans”, former Reagan White House budget director David Stockman told a reporter last week, “no longer have a democracy.” Instead, Stockman charged, we have “crony capitalism,” a system that’s rigging the economy to benefit the powerful few — at everyone else’s expense.
Last week brought still more evidence on how revoltingly raw this rigging has become. Wall Street and Corporate America, new data detail, have some incredibly thoughtful cronies who sit in some incredibly important places.
Some of these cronies run the Federal Reserve. Others serve on corporate boards of directors. Together, they’ve made the Great Recession a Great Sensation — for America’s corporate and banking elite.
Let’s begin with the cronies that Wall Street can count on at the Federal Reserve, the formally independent institution that’s supposed to safeguard America’s financial health. Late in 2008 and early in 2009, the crunch time in our recent financial meltdown, these cronies at the Fed made hundreds of billions of dollars available to America’s biggest banks, at near-zero interest rates.
This generosity, Fed officialdom assured us, had a public purpose. The banks, the argument went, would turn Fed dollars into needed loans for small businesses.
Bernie Sanders, the independent U.S. senator from Vermont, didn’t quite buy that explanation. He shoved into the financial reform bill that passed Congress last summer a provision that forced the Fed to reveal exactly who received all those near-zero-rate loans.
Sanders subsequently had the Congressional Research Service analyze the data that disclosure produced. Last week, Sanders released the CRS analysis.
The nation’s six largest banks, the CRS researchers found, took those near-zero-rate billions the Fed so graciously loaned them and bought federal bonds. The federal bonds they bought paid the banks a much higher interest rate than the banks were paying on their loans from the Federal Reserve.
In effect, says Sanders, the Fed was providing America’s big banks “free money.”
In 2008’s fourth quarter, for instance, JPMorgan Chase was sitting on $10.1 billion in 0.6 percent-interest loans from the Fed. At the same time, JPMorgan Chase was holding $10.3 billion in U.S. government securities that yielded 1.7 percent.
In that same quarter, Citigroup had $32.3 billion in Fed loans, at interest rates as low as 1.1 percent. The bankers at Citi, the CRS found, “simultaneously held $24 billion in U.S. government securities with an average yield of 3.1 percent.”
The resulting “free money” from this sort of swapping would eventually help right Citi’s shaky ship — and generate huge windfalls for the speculators who had bet on Citi’s survival. Hedge fund manager John Paulson, all by himself, pocketed $1 billion betting that Citi would not sink.
Off Wall Street, at about the same time, the cronies of America’s top CEOs — the power suits who sit on corporate boards of directors — were doing their best to outdo the gracious generosity the Fed was showing the nation’s biggest banks.
These corporate directors, in the meltdown months of late 2008 and early 2009, showered their CEOs with stock options. By standard accounting conventions, these options didn’t seem to be worth all that much. Corporate stock, after all, was selling at the time at decade lows.
Corporate directors, in their rush to please, would endeavor to offset these depressed share prices by handing their execs more options than usual. Starbucks CEO Howard Schultz, for one, collected 2.7 million options in November 2008, about quadruple the number of options he had received the year before.
The options gave the Starbucks CEO the right to buy, at a future date, 2.7 million of the latte giant’s shares at the low they hit in November 2008. For accounting purposes, Starbucks valued the total option grant to Schultz at $12.4 million.
In the two and one-half years since then, Schultz has axed the jobs of 39,000 Starbucks workers and quadrupled the Starbucks share price. The 2008 option grant to Schultz, the Wall Street Journal noted last Tuesday, would, if redeemed today, add $76 million to the Schultz family fortune.
Starbucks shares, despite their recent rise, are still running 5 percent under their price five years ago. In other words, Starbucks shareholders who bought their shares in 2006 are still swimming in the red, while tens of thousands of baristas are looking for work and Howard Schultz is admiring a colossal windfall.
But the cronies-in-the-corporate-boardroom story stretches far beyond Starbucks, as the new data the Wall Street Journal released last week show.
Ninety percent of the CEOs at America’s top 500 companies grabbed up stock options at the depth of the Great Recession. These options, if exercised today, would bring the 500 CEOs an amazing $3 billion more than their companies originally estimated in 2008 and 2009.
The big option grants corporate directors handed out back then have become, muses CEO compensation consultant Brian Foley, winning “lottery tickets.” Executive pay, adds analyst Frank Glassner, has been “turbocharged.”
Cronies have, of course, always accompanied capitalism. But some economic eras do seem to see cronyism playing a more dominant role than others.
Our most crony-heavy eras — the Gilded Age after the Civil War and the Roaring Twenties — share a great deal in common. They all have wealth concentrating at America’s economic summit, with little or no pushback from government.
We’re living in just such an epoch today. With annual rewards running as high as $4.9 billion, the top hedge fund take-home last year, the incentive to grab for the brass ring — by any means necessary — can become overwhelming. In that climate, the illegal and the unethical become everyday business practice.
We can, with David Stockman, call this corruption “cronyism.” But back scratching isn’t driving the greed dynamic we see all around us. Inequality is.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.