This is the second installment of a 3-part essay about the current American dilemma by The Rights Factory author Kamal Gupta, author of PLAY IT RIGHT. Click here to read Part 1.
A Fine Mess
The revolving door between big business and the U.S. government has ensured that there is no public service in America anymore (at least at the top). A stint in government has turned into either a tax payoff for past earnings (Hank Paulson) or a prelude to post-retirement riches (Timothy Geithner). The door at the Securities Exchange Commission (SEC) is especially fast-spinning and has led to corporations rarely being held to account for their misdeeds. When caught, they simply pay a fine and go back to conducting business as usual, a luxury that is almost never afforded to an individual. It almost makes one wonder if CEOs consider fines to be just another cost of doing business.
Not a single Wall Street chief executive was held to account for their role in the great financial crisis of 2008. This is particularly shocking in light of the fact that the companies they ran paid crisis-related fines in excess of fifty billion dollars! In fact, the roots of the financial crisis can be traced back to an April 2004 SEC change in the net capital rule that allowed investment banks to sharply increase their risk taking. Not surprisingly, the change was championed by a gang of broker-dealer CEOs led by Hank Paulson of Goldman Sachs himself. By a supreme irony the three men charged with steering the US out of the 2008 financial crisis — Paulson, Bernanke and Geithner — all played a role in igniting the conflagration in the first place.
One financial institution in particular, HSBC, incurred fines repeatedly from 2007 to 2019 for abuses ranging from laundering money for drug traffickers to manipulation of the foreign exchange market. And yet, the company itself never faced any criminal charges. In a particularly cruel twist, the authorities arrested two of HSBC’s currency traders for an insider trading scheme that generated a whopping eight million dollars in profits even as the bank itself was paying fines by the billions. Likewise, Boeing resolved the 737 Max-related criminal charges — “conspiracy to defraud the United States” — by paying $2.5 Billion. The Department of Justice claimed that this “agreement holds Boeing and its employees accountable,” when it did no such thing. The company’s CEO, Dennis Muilenberg, was allowed to walk away with a $58 million payoff despite being partly responsible for the deaths of 346 innocents.
Any doubts about how CEOs perceive these fines were removed in a 2013 conversation between Senator Elizabeth Warren and Jamie Dimon, the CEO of the banking giant J.P. Morgan. When confronted by the senator about his company potentially breaking the law, he replied, “So hit me with a fine. We can afford it.” I doubt if Dimon would have been quite so smug if any of his compatriots had been imprisoned after the 2008 financial crisis.
The supreme court has also come down on the side of corporations, giving them the first amendment right to make unlimited political expenditures (Citizens United v. Federal Election Commission). The idea of corporate personhood is not a new one and the 2012 Republican presidential candidate, Mitt Romney, embraced it while saying, “corporations are people too.” If corporations are people too then, in a country with the world’s highest per-capita incarceration rate, why don’t we see more corporations (or at least their CEOs) being jailed for their crimes?
Corporations are not people. They are a structure created by mankind for profit and to hide behind whenever any wrongdoing comes to light. Not a single Wells Fargo executive was jailed for fraudulently creating millions (millions!) of accounts without the bank’s customers’ consent or knowledge. As always, the company simply paid a fine and moved on. That fine, several billion dollars, might have appeared large on the surface but it represented a small fraction of the corrupt bank’s annual pre-scandal profits.
It wasn’t always this way. I believe that America’s slide into corporatism began with a bill passed in the early days of the Clinton administration. Here is a description of the law from the U.S. treasury’s website:
This legislation capped a public company’s corporate income tax deduction at $1 million per year for amounts paid to each of its top five executives. This $1 million limit includes income from salary, bonuses, stock grants, and other compensation, but it does not include income that relates to performance pay such as a non-equity incentive plan, stock options, stock appreciation rights, pensions, and deferred compensation (if deferred until after retirement).
The gaping loophole in the law relating to performance pay set the stage for a dramatic shift in CEO pay — from salary, bonuses, and stock, to stock options. With their compensation now highly levered to the price of their company’s stock, CEOs set about maximizing their pay with gusto.
Simply speaking, the price of any stock boils down to the price-to-earnings (PE) ratio multiplied by profits (revenue minus expenses). The PE ratio is determined by the market at large and is beyond a CEO’s control. And, for the most part, so is revenue. An increase in demand comes from either building better products or a growth in population, both of which happen slowly. The fastest way for a chief executive to boost profits, and by extension his stock price, is to cut expenses.
The easiest way to cut costs was to move factories and call centers overseas, a process aided by the passage of the North American Free Trade Agreement (NAFTA) which also went into effect in 1993. Since then, it seems like every factory in America has moved to China or Mexico and every call center to India, a shift that has left the American worker stranded. This so-called “globalization” was championed as much by Democrats as it was by Republicans (The two parties may not agree on much but they are united in their love for corporate cash). Globalization bears a significant responsibility for the hollowing out of the US middle class and the ensuing opioid crisis in the heartland. It is also to blame for America’s massive trade deficits. The US trade deficit with China alone ballooned from a meager $10 billion in 1990 to a whopping $418 billion in 2018 (It has come down since but is still over $300 billion). Likewise, the trade deficit with Mexico has gone from zero to over $100 billion.
The CEO of the world’s most valuable corporation, Apple, earned $98.7 million in 2021, the vast majority of which came from stock options. Even though every iPhone proudly states “Designed by Apple in California,” it is public knowledge that the company manufactures virtually all of its products overseas. By Apple's own account, it supports almost five million jobs in China as opposed to just two million in America. A 2012 article in Harvard Business Review — a publication not exactly known for defending workers’ rights — claimed that Apple has to (has to!) manufacture in China because “There is simply no factory capable of employing 250,000 workers day and night in the USA.” The article concludes that Apple's location decision “isn’t really about labor costs” but about managing manufacturing risk, as if the two can ever be separated. The write-up is also mute about the political and social climate in China that makes such a marshalling of resources possible.
While all of this is bad news for the American worker, it has been nothing but roses for the U.S. stock market. Over the last three decades, the S&P 500 has climbed ten-fold, creating tens of trillions of dollars in wealth. The overwhelming majority of these trillions have gone to the top 1% whose net-worth has increased lockstep with the stock market, from $5 trillion in 1990 to $44 trillion in 2021. The one-percenters today own an astonishing one-third of total wealth in America while the bottom half’s share amounts to an embarrassing 2%.
It would be difficult to argue therefore that the institutions of America are working for the benefit of its population. The rage against the state of affairs is understandable but, instead of directing it against each other, it needs to be channeled towards bringing about real change.
Interested in reading more from Kamal Gupta? PLAY IT RIGHT is on sale now.