CEOs “cashed out” prior to economic crisis

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http://www.wsws.org/articles/2008/nov2008/ceos-n28.shtml

 

 

CEOs " cashed out " prior to economic crisis

 

By Tom Eley

28 November 2008

 

Balzac's maxim that " behind every great fortune lies a great crime "

may yet prove a fitting epitaph for American capitalism. A recent

survey by the Wall Street Journal reveals that CEOs at major US

financial and real estate firms converted tens of millions of dollars

of overvalued stock into cash prior to the eruption of the current

financial crisis, even as many of their corporations approached the

precipice.

 

The Journal analyzed the fortunes of CEOs from 2003 to 2007 based on

executive compensation and stock sale data. Fifteen of these CEOs took

home more than $100 million in cash during this period. At the high

end was Charles Schwab, who made over $816 million from his self-named

accounting firm, almost all of it from stock sales.

 

Of the 120 publicly traded firms the Journal analyzed, CEOs cashed out

a total of more than $21 billion. However, data was gathered only from

publicly traded companies, and thus does not include similar fortunes

that have been made by " hedge fund chiefs, Wall Street traders, and

executives who sold their companies outright. " Nor did it include data

related to exit packages, the multimillion-dollar " golden parachutes "

awarded to retiring or fired executives.

 

The Journal's findings underscore the parasitism and criminality of

the US financial elite. Defenders have long justified extravagant CEO

pay by claiming that these were the talented " risk-takers " who

generated enormous wealth for investors. But the Journal's data shows

that there is no correlation between compensation and a firm's

success. On the contrary, many CEOs rewarded themselves just as their

corporations approached ruin.

 

These included Richard Fuld, the CEO of Lehman Brothers, who

transformed his firm's stock into well over $100 million in cash. When

added to his salary and bonuses, Fuld pocketed nearly $185 million in

the five years before 2008, even as he guided his 150-year-old

investment bank to ruin. James Cayne of Bear Stearns did nearly as

well at his investment bank, collecting over $163.2 million, the vast

majority of which was garnered from selling stock that would soon be

scarcely worth the paper upon which it was printed.

 

Maurice Greenberg of American International Group (AIG) made $132.8

million between 2003 and 2005, when he was forced to resign. Well over

$100 million of this came from windfall stock sales of the giant

insurer. AIG collapsed in September, but was determined to be " too big

to fail " by the federal government, and was bailed out twice in less

than one month to the tune of some $120 billion.

 

In August, the sub-prime mortgage giant Countrywide Financial Group

collapsed spectacularly, and was absorbed by Bank of America. In the

previous five years, however, Countrywide's CEO, Angelo Mozilo, took

home $471 million, over $400 million of which came from sales of the

company's soon-to-be-worthless stock.

 

A look at the sectors of the economy where these richly remunerated

executives worked, moreover, demonstrates the advanced rot of the US

economy as a whole. Without exception, they represented corporations

that engaged in financial speculation— " industries closely tied to the

financial crisis, " as the Journal puts it—and that produced no real

value. These until recently " vibrant " parts of the economy functioned

only to siphon off enormous social wealth and deposit it in the bank

accounts of the CEOs and big investors.

 

One example the Journal considered is the private student loan sector,

which made Daniel Meyers, the CEO of a firm called First Marblehead, a

very wealthy man. Marblehead specialized in servicing loans to

students who had " exhausted the cheaper government-backed variety, "

and then repackaging and selling the debt to big banks such as Bank of

America. Meyers earned nearly $100 million, almost all of it in the

sale of company stock; together with other Marblehead insiders, $660

million was taken. The Journal notes that Meyers used $10.3 million of

his fortune to buy an ocean-front property in Rhode Island—the state

with the highest unemployment rate. Meyers tore down the villa that

was there and has put up a 38,000-square-foot mansion he named,

befitting a pirate, " Seaward. "

 

Another sector of the economy that has proved highly lucrative for

CEOs is that of home mortgages. In addition to the aforementioned case

of Angelo Mozilo and Countrywide, the Journal highlights the case of

New Century Financial, the nation's second largest subprime lender.

While the lender is now bankrupt, over a period of four years its

three leading executives took home a combined $74 million. The Journal

also mentions the case of Herbert and Marion Sandler, who made $2

billion off selling their mortgage firm, Golden West Financial Corp.,

to Wachovia in 2005. This purchase likely contributed to the demise of

Wachovia, which collapsed in October and was bought out by Wells Fargo.

 

In the field of " credit-default swaps, " Michael Gooch made $82.5

million through his firm GTI Group. Over $77 million of this came from

a remarkably well-timed sale in May of 2006. Since then, GTI's stock

has lost over 90 percent of its value. Gooch owns three mansions, and

boasted to the Journal that he could pay off his only debt, a $1

million mortgage, " with the spare change in my bank account. "

 

The Journal notes with some surprise that one of the most highly

remunerative fields was that of " home-building. " The wealth

accumulated by CEOs in this sector is a clear byproduct of the

speculative real estate bubble that emerged over the last decade. Toll

Brothers, specializing in building suburban mansions, made Robert and

Bruce Toll three quarters of a billion in cash, largely in stock

sales. The company has lost 74 percent of its value in the past year.

 

Chad Dreier, CEO of Ryland Group, made $181 million building homes in

" hot markets " such as Las Vegas that have now gone bust, exposing

thousands of families to foreclosure. Dwight Schar, the CEO of a

building firm called NVR, took home $626 million in 2003-2007, almost

all from the sale of stock. Schar spent about $86 million of this

fortune in 2005 to buy the Palm Beach, Florida estate of billionaire

Ronald Perelman. The Journal notes that the 11-acre oceanfront complex

includes two swimming pools and a tennis court.

 

It is perhaps a sign of the times that the Wall Street Journal, long a

mouthpiece of US finance capital, would run a prominent article that

questions the enormous personal fortunes built up by CEOs through

dubious means even as their corporations sailed toward disaster.

Running such an article aims in part, no doubt, to appease the rage of

thousands of middling investors who have lost their shirts in the

economic crisis.

 

In any event, the criminal methods of these CEOs, who have led their

companies and American capitalism as a whole to the brink of ruin, do

not derive from personal greed alone. In their criminality and

nearsightedness the CEOs reflect, instead, the narrowing horizon and

historical decline of US capitalism, in which the accumulation of

extreme wealth long ago lost whatever connection it had to the

creation of real value.