Writing this blog is an educational exercise. At its beginning, I had less focused ideas about the excesses of Wall Street, a timid government and an abused middle class. Now, as I investigate and analyze people, institutions and events shaping our situation, I am synthesizing a philosophy of what is really going on in 2010 America.
Once Upon a Time in America
We are all captive to and shaped by our experiences. Corporate America in the 1970’s, the time and place where my career began, was a different era. CEO compensation was modest. A junior attorney in a very large corporation and the general counsel (a “proxy 5 officer”) were paid in a 1:4 ratio. When I retired in 2009 the general counsel made more than 90 times the compensation of the most junior attorney. The first CEO for whom I worked agonized over layoffs, and a layoff itself was a rare event. Layoffs were temporary, with employee recall rights. Endless internal discussions preceded consolidation of facilities or plant closings.
Enter the Age of Financialization
Sometime in the 1980’s someone flipped a switch and we entered the age of financialization. Perhaps this mythical paradigm shape shifter realized that Fortune 50 corporations could not exceed the 3-4% annual US GDP growth rate without engaging in financial game playing.
Employees became a fungible expense. The focus was not on increasing sales or growing the business, but rather on cost control. The reigning logic was that eliminating an expense saved 100 cents on the dollar, but revenue return yielded at most 10 cents on the dollar. Thus growing the business was sacrificed on the altar of cost savings. Add in the threat of corporate raiders, takeover artists, merger partners and others, and ruthless financial efficiency trumped growing the business. Loyalty to customers, employees and communities became secondary bogus public relations. Mass layoffs, subcontracting to domestic vendors and outsourcing to foreign countries, plant closings, divestitures, and joint ventures became talismans to support shareholder value. Cutting expenses was easy, therefore good; growing the business was hard, therefore bad.
It was not a great leap to start thinking of businesses as cash cows to financially manipulate and enhance results. Newly minted MBAs were only too happy to implement leveraged employee stock ownership plans, hybrid debt/equity securities, share buybacks, pension plan freezes and terminations, company owned life insurance schemes and debt/equity swaps – all in the name of heightening shareholder value. Such “sophisticated” corporate stewardship also required enhancing executive compensation with stock options, mega grants, long and short term bonus awards to align the executive with shareholder interests.
Too Much of a Good Thing Always Ends Badly
The experience of industrial corporations relying on financial maneuvering in the 1980s and 1990s was prologue to the financial excesses of the past decade. Financialization took hold of the entire economy. We rationalized that services, especially financial services, would make up for declining manufacturing. The financial oligarchs moved to center stage. Until the current financial crisis neither the regulators nor the media were willing to monitor, analyze, criticize or curtail the shoddy practices and political dominance of Wall Street.
Perhaps the SEC suit against Goldman Sachs is a watershed event. Obama’s decision to bail out the banks in hopes of more lending has proved a false hope to small business and the middle class. These duped constituencies may not understand the fine points of collateralized debt obligations or mortgage-backed securities, but they do get it. The media regularly regales the electorate with outsized bonuses award to the barons of Wall Street while unemployment and under employment remain at near all time highs. Even more galling is that these same financial institutions were on bended knee in 2008, asking for TARP funds, loan guarantees and cheap money for their very survival.
The Jury is Out
We are at a defining moment. Are the banks going to control the government? Does the Obama Administration have the courage to break from the financialized economy? Will he fire Bernanke, Summers, Rubin and Geithner and regain control of the government? Is the SEC action against Goldman a one-time publicity stunt or a sea change in enforcement?
Right now the middle class is seething with limited job prospects, declining home values, a diminished retirement portfolio and increasing taxes. We feel cheated by Wall Street and the actions of our largest financial institutions.
Financialization taken to the extreme has led us to where we are. We need wise and firm political leadership to lead us out. Given the weak response of the last two administrations, I have my doubts.
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