The Senate’s vote for the Fed’s Chairman will be viewed as a crucial test for who stands with Wall Street and who stands with Main Street.
After some slightly encouraging rumblings in the contrary direction, it appears that the Senate is poised to confirm Ben Bernanke to a second term as Chairman of the Federal Reserve. Certain senators may be putting their jobs on the line when they do, however.
More and more, Main Street wants to know who stands with it. Mr. Bernanke is not seen as one of those figures. Having been part of the Greenspan-era bubble and then, even as Fed chairman himself, still blind to the dark clouds of financial crisis that were forming, his response was to shove an incomprehensible amount of money and support at Wall Street and the major banks. But he failed to come clean on the Fed’s dealings with the financial institutions that have been taking advantage of these generous programs and, in fact, has aggressively moved to prevent transparency and public scrutiny of them in a landmark case involving Bloomberg News.
Mr. Bernanke’s role in the AIG bailout, and in permitting the secret (at the time) payment of billions to other banks, including Goldman Sachs, is still not fully explained. In the nearly two years since this crisis was apparent and more than 12 months since Lehman Brothers was allowed to collapse, the Fed under Mr. Bernanke has failed to conduct any meaningful internal review as to what went wrong, what signals were missed and what steps the Fed needs to take to address them. At the very least, a vote on confirmation would seem premature until all the work by TARP’s inspector general, Neil Barofsky, is completed, including questions about AIG’s Fed-approved counterparty payments.
But Mr. Bernanke’s statement to legislators that he did as much as possible to prevent paying 100 cents on the dollar to Goldman is revealing on its face. Can you imagine the legendary Arthur F. Burns, who ran the Fed under President John F. Kennedy, or William McChesney Martin Jr., who served under a record five presidents, ever being blown off by some bankers who did not want to cooperate at a time of national crisis? Or is it a matter that Mr. Bernanke has grown so close to the big banks and their Wall Street cousins over the seven years he has been at the Fed that he just can’t say no to them? There is a reason why Wall Street itself is voting overwhelmingly in support of Mr. Bernanke’s second term, and it’s not because it thinks he’ll be great for Main Street.
Mr. Bernanke is a little like the $700 billion TARP legislation which he co-authored (with then Treasury Secretary Henry Paulson) in the fall of 2008. In a voice trembling with urgency, he told Congress that if it were not passed and implemented immediately, the entire economy would likely collapse. But the TARP was never used for its intended purpose. It did not address the main problems, as we predicted at the time. No toxic assets were ever bought up with it. It rattled many in Congress who thought they had been sold a bill of goods. And more than a year later, a couple of hundred billion of it has not been spent and still many additional costly initiatives were required to get the economy moving.
Has the reconfirmation of Ben Bernanke itself become something of a TARP, where what is being sold is not quite what is needed and will not be used for the intended purpose? Will the world really end if Mr. Bernanke is not reappointed? Or is there more risk of the opposite happening because he will miss other disasters that are brewing, just as he missed the early signs of the current one. Worse, will his cozy relationship with Wall Street end with a hideous price tag that drops like a rock at the doors of Main Street? Already, trillions in liquidity have been unleashed and the Fed’s balance sheet – a key measure of its lending to the financial system – has ballooned into the record trillions.
A clean break from the past of tolerated bubbles, missed signals and overly generous policies directed at the players who caused the problems in the first place is what is needed. Mr. Bernanke’s priorities, loyalties and convenient evasions have made him a poster boy for the discontent of Main Street and a part of what drives the forces of turbo populism.
Four years from now, Mr. Bernanke may very well be in office. But will President Obama and the senators who vote for confirmation and against the perceived interests of Main Street? It’s a role of the dice that should cause wise lawmakers to think twice.
It’s encouraging to hear that our earlier comparison between Fed Chairman Bernanke and Titanic Captain Smith was not lost on some senators.
The greatest experiment in democracy the world has ever known, made great because of its concept of checks and balances, is about to become bought and paid for with checks from Walmart and the like. It is a decision that is tailor-made to place a heavy coat of cynicism on a public already overly clothed in suspicion.
Having hijacked the U.S. Presidential election in 2000 in what even many conservative judicial scholars rate as one of the weakest and most contradictory legal rationales in U.S. Supreme Court history, the remnants of this group have now largely expropriated the democratic process and handed it over to the giant American corporation.
The putative privatization of political campaigns occurred with the 5-4 decision of the court handed down this week in Citizens United v. Federal Election Commission. This was the case where Chief Justice Roberts, who eventually supported striking down the limits the law previously imposed on spending, thought the matter to be so important that he took the rare step of scheduling oral arguments during the court’s vacation period this past summer. Some have drawn conclusions about what that says for the court’s willingness to do the bidding of moneyed interests.
Justice Kennedy, writing for the majority, which included the Chief Justice along with Justices Alito, Thomas and Scalia, cited the right of free speech in striking down existing limits on political spending by corporations (and other organizations). But the First Amendment ought not, we think, to confer the right of any organization or group of organizations to have their opinions stand first and foremost. This is precisely what will happen now that the floodgates are opened to unlimited election advocacy spending. It will be the organization with the most money whose opinion will count the most, as anyone who has ever been involved in the political process knows. Ask any candidate about the importance of money and advertising in politics today. Ask what would happen if they were facing an opponent whose views were supported by a blank check. How much chance would their voice have of being heard in the real world, which is clearly not the same one these five justices inhabit.
It can be argued that the decision also frees up limits on other groups and allows their voices to be heard more fully, creating some kind of abstract marketplace of ideas where the public ultimately weighs and determines the best political decision. But this is a little like a naive first-year law student praising a legal system where it is held that all people have equal access to justice and that a plaintiff represented by a single country lawyer has the same chance to prevail as a giant corporation with thousand-dollar-an-hour attorneys backed up by armies of associates, investigators and paralegals. The theory is nice, but talk to someone who has lived the experience and a different picture generally emerges. Like a giant gorilla on a teeter-totter, money is almost always the greatest de-leveler in any electoral or judicial park.
This decision risks making political parties irrelevant; the real players will be the guys in the suits on K Street who will be stacking crates of cash behind their clients’ causes. Lobbyists will have a field day; they will become in many ways a shadow government and Washington’s most influential policy makers. Imagine that kind of power, if you will, in the hands of the big banks or the AIGs of the world, who brought you the worst financial meltdown since the Great Depression. Imagine how much more banks will be able to enrich themselves by blunting the role of regulators and making sure, if Wall Street screws up again, it will have ready access to even more public bailout funds. Imagine a world where drug companies and chemical producers no longer have to worry about a watchful FDA or other agencies who are supposed to protect consumers from faulty products.
In the majority decision, Justice Kennedy forcefully asserted “This Court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.” Perhaps he has forgotten one of the lessons of Watergate. Some thirty-five years ago, at the height of that scandal, it was revealed that more than 400 major U.S. corporations, including top names such as Gulf Oil, Exxon, Mobil and Lockheed were found to have made secret payments to foreign government officials around the world. The Corrupt Foreign Practices Act was passed by Congress to ban such payments in the future. Would a Congress where the campaign influence of these companies had no bounds pass such a law again? Might it even repeal this one?
In a day where the power of large corporations and other organizations more and more outweighs the voice and interests of the ordinary individual, it is often during elections – and only during elections – where that voice has any real chance at all of being counted. The growing size of entrenched interests and the frustration people feel in the face of established power lies at the heart of what we call turbo populism. People do not want to see more great concentrations of power mounted against Main Street. They are looking desperately for the opposite at a time when they have already had to pay too much for the abuse and incompetency of both Wall Street and Washington. The decision is tailor-made to place a heavy coat of cynicism on a public already overly clothed in suspicion.
The Supreme Court did not hear that voice this week. It heard only the self-aggrandizing views of those with a great deal of power and wealth who are determined to grab yet more. They are now able, unchecked, to use elections for that purpose.
Twice in the span of a decade, self-described conservative guardians against judicial activism have intruded into the democratic process on a scale no liberal judge would ever dare. The first effort shaped the outcome of a presidential vote. Now they have set the stage for the wealthiest to shape all future outcomes. The greatest experiment in democracy the world has ever known, made great in large part because of its concept of checks and balances, is about to become bought and paid for with checks from Walmart and the like.
Fear for the long-term health of democracy is an appropriate reaction to this decision, as Justice John Paul Stevens eloquently adumbrates in his passionate minority opinion. But outrage quickly follows to fuel public demands for change and efforts to curb the threat this decision portends.
Fortunately, the largest corporations are still governed by securities regulations that can set out what decisions shareholders themselves are required to make.
Mr. President, give the SEC a call.
Wise leaders know that it is never sensible to underestimate either the forces of nature or the power of public outrage. Washington and Wall Street are about to receive an important lesson in history.
The winds of change can blow in both directions. One year ago, they propelled Barack Obama into the White House on a current of support from every quarter of society. Today, the President finds himself pushing against mounting gales of outrage and discontent, leaving his popularity diminished and his agenda for reform in doubt. This is his first, but likely not his last, major encounter with what we have dubbed turbo populism. Fueled by the costs of two far-off wars, record deficits, unprecedented levels of CEO pay and historic rates of unemployment, what lies at the heart of this movement is a revolt over the power and perks of entrenched interests, whether they are found in Washington or on Wall Street. By the time it ends, more than just Mr. Obama and a very unimpressive candidate who lost her party’s bid to retain the seat held by Massachusetts Democrat Edward M. Kennedy and before that, John F. Kennedy, will have experienced some very Rolaids days.
Abuses on Wall Street and excesses on the part of its key players which led to the worst financial crisis in generations are also featured actors on this stage of seething discontent. The sight of bankers salivating over bigger bonuses has not gone over well among ordinary Americans, who continue to struggle with jobs losses, spiraling home foreclosures and a crushing national debt. Mr. Obama’s stalwart support for Ben Bernanke as head of the Fed and Timothy Geithner as Treasury Secretary, both now facing major questions about their roles in the bank bailout and whether they are too close to Wall Street to serve the needs of Main Street, have placed the President in an awkward position for one who campaigned so vigorously on the promise of change. Health care reform now seems to have been the victim of almost terminal mismanagement by the White House and by the Democratic leaders in Congress, who, in doling out deals to various senators in exchange for their votes, did exactly what Mr. Obama campaigned to change: the way Washington works.
Changing the way politics is done struck a populist chord on the campaign trail, where the forces of unease and the preponderant view that America was on the wrong track, gave momentum to Mr. Obama’s message. But now, that same misdirected train has turned to face the White House and a political process that so many of its dissatisfied passengers still find intolerable. What it seems many Americans, especially independent voting Americans, were banking on in Mr. Obama’s policies was that more hope would be focused on Main Street and less audacity would be displayed on Wall Street.
Over the past year, America and its admirers have witnessed the spectacle of business leaders who were paid hundreds of millions of dollars admitting that they did not see the coming storm clouds of their own creation. But they still kept the hundreds of millions. Men who were once trumpeted as financial titans and graced the covers of countless genuflecting magazines have been humbled in a way not seen since the 1930s. Former Citigroup CEO Sandy Weill recently confessed that he always thought the company, whose stock continues to languish in a $3.50 shell of its nearly $50 glory, was “impregnable.” He was apparently stunned by the extent of Citi’s meltdown. “I felt that we should be able to weather that storm,” Mr. Weill recently told the New York Times. No amount of miscalculation, however, prevented Mr. Weill from pulling in more than half a billion dollars in the late 1990s and early 2000s, or being appointed to the board of the New York Federal Reserve in 2001. Icons like General Motors and Chrysler have become financial wards of the state. Their descent to that status did not prevent those at the top from pulling in tens of millions in compensation, however. On the tenth anniversary of what was then billed as the deal of the decade, the merger of AOL and Time Warner is now seen as the marriage from hell, costing tens of billions in shareholder value, lost earnings and vanished jobs. Only last week, three CEOs of leading Wall Street firms admitted to a Congressional inquiry that they were as surprised as anyone when the credit crisis struck in 2008. The trio of Jamie Dimon (JPMorgan Chase), Lloyd Blankfein (Goldman Sachs) and John Mack (Morgan Stanley) were not compensated like anyone, however. Collectively, they were paid more than $300 million over the past five years.
Leaders often fail to heed the growing signs of change and disaffection when they are fond of basking in the reflection of their own egos instead of looking at where reality commonly resides.
The betrayal of elites, or at least the promise of their much-vaunted magic, both in business and in the political arena, the scale of the abuses and excesses of the few and the costs they inflicted on the many, the pervasiveness of leaders who place the claims of special interests over cries for public good – these are among the backdrafts and jet streams that have unleashed the winds of turbo populism. And like the concept of stakeholder capitalism, a term we coined more than 20 years ago to mark the growing dissatisfaction of institutional investors and pension funds with the self-aggrandizement of management and the somnolent tendencies of boards, this latest wave of populist outrage will be coming soon to a boardroom near you.
Sometimes, change comes in battalions, as it did with the campus upheavals of the 1970s and the swelling protests demanding an end to the war in Vietnam. Other times, it arrives clothed in the moral authority of a single man, as it did with Mahatma Gandhi and Rev. Martin Luther King Jr. Occasionally, it will come in the form of a Tea Party or just one too many credit card holders fed up with paying interest rates of 30 percent when the bank is getting money courtesy of the Fed at zero percent.
Wise leaders, as history has shown, do not wait for a call from Western Union before they get the message the people are trying to send. They know that it is never sensible to underestimate either the forces of nature or the power of public outrage. Both have the occasional tendency to sweep aside pillars of man-made glory and monuments to entrenched interests as if they were mere castles of sand.
Welcome to the era of turbo populism.
Never in the history of modern business leadership have CEOs been paid so much to achieve so little at such cost to so many.
At the opening hearing of the Financial Crisis Inquiry Commission held in Washington this week, key players in the worst financial meltdown since the Great Depression admitted they did not see it coming. The chairmen and CEOs of JPMorgan Chase and Goldman Sachs, Jamie Dimon and Lloyd Blankfein, and the chairman of Morgan Stanley, John Mack (who used to be its CEO as well) all testified that they were surprised at what happened. They now agree they were overly leveraged and did not handle risk with the respect it deserved. Mr. Dimon apparently never contemplated the possibility that housing prices would stop rising, much less decline.
It seems that Messrs. Dimon, Blankfein and Mack had as much vision in anticipating the downturn, and the folly of some of their assumptions about growth, as over- extended buyers of subprime mortgages had. Except that Dimon, Blankfein and Mack were not struggling low-income homebuyers who took on one too many bedrooms. They were among the highest paid executives on the planet whose word commanded deference and awe among much of the investing public, the media and an ever-admiring circle of policymaker-groupies.
Over the five years leading up to the subprime debacle in 2008, these three men were collectively paid more than $310 million. For the year 2006 alone, when so many of the seeds of disaster were being sewn on Wall Street and among its top banks, Mr. Dimon was paid $57 million and Mr. Blankfein $38 million. When Mr. Mack rejoined Morgan Stanley in June 2005, he was awarded stock worth $26 million on day-one, and a further $13 million in compensation and benefits for his first five months of work. In December of 2006, Mr. Mack was awarded a bonus of $40 million on top of his $1.4 million salary.
As they were being paid these sums, much of the world was increasingly convinced that these were proper incentives to ensure alignment with shareholder interests. They earned every penny million, it was thought. The prevailing view, especially among the wishful thinking and the non-thinking alike, was that such men were really superheroes whose ability was so unique and so far beyond those of ordinary mortals, the fact that their feet touched the ground when they walked was seen merely as one of their many generous concessions to convention.
They were not alone, of course. There have been hundreds of CEOs who have happily participated in the greatest transfer of wealth of its kind –a transfer that, for all the soaring salaries, bonuses and stock options, has ultimately seen the worst economic crisis since the 1930s, the highest job losses in generations and a stock market performance over the past ten years that has produced virtually zero gains, except for the titans and bankers who managed to cash out before the fall.
The 21st century began with a series of corporate scandals involving companies like Enron, WorldCom, Tyco and Hollinger. It ended its first decade in the throws of the worst financial failure in modern time. One thing stands out to mark the beginning of this period and its end: the folly of executive compensation. In 2002, we warned Congressional committees: “The most corrosive force in modern business today is excessive CEO compensation. Such lofty sums tempt CEOs to take actions that artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.” The extent of that corrosion and fall is apparent today. The consequences in taxpayer dollars soar into the trillions. The costs in human terms remain beyond calculation, as does the loss of confidence in corporate leadership.
More than just Lehman Brothers, a few banks and a couple of Detroit automakers went bankrupt in this period. The trust of workers, the middle class and pensioners in corporate management and governance has also collapsed. There may be a seismic ruin of jobs, dreams and foreclosed homes on Main Street. But on Wall Street, where people like Mr. Dimon, Mr. Blankfein and Mr. Mack still command adulation for their leadership and vision, the Fed-supported, taxpayer-rescued towers of finance give hope and comfort to those still requiring generous bonuses to get through their Tiffany-challenged day. The magnitude of their gains this year, less than 18 months from a once- in-a-lifetime experience looking into the abyss, promises also to set new records, which, like housing prices, is something Mr. Dimon thinks should go only one way, too. Recently, he announced that he was sick and tired of the criticism being leveled against Wall Street on the compensation front.
These are forceful accelerants to the rise of Turbo Populism, the term we coined on these pages and will be speaking more about in the future.
Had the world the benefit of a modern Churchill capable of battling the monstrosity of betrayal and failure these titans of excess have wrought, he would surely have given voice to a mood that is thundering across the land from kitchen tables and church pews to swelling unemployment lines and Twitter postings: Never in the history of modern business leadership have CEOs been paid so much to achieve so little at such cost to so many.
This is a reality that escaped the CEOs who appeared before the Congressional committee this week. They do not escape our sense of outrage.
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At the opening hearing of the Financial Crisis Inquiry Commission, the bipartisan committee formed by Congress to investigate the causes of the great financial meltdown, there were four chairmen of key Wall Street players in the crisis. There was much anticipation over the proceedings held today in Washington. Since its formation last spring, the Committee has had months to prepare for this day. But there was not a single probing question, as far as we could tell, from chairman Phil Angelides or any other member of the panel, about the role of the board of directors. This is a glaring omission, if you believe that boards matter and what directors did or did not do to avoid the disaster is an important part of the review.
It is one thing for boards to constantly underperform or are not taken as seriously by their executive chairmen as they should be, or as an independent, non-management, chairman might want them to be. It is quite another when an inquiring body appears to forget that, in law and in principles of modern business practice, the buck stops with the board of directors. Where were they?
We will have more on this disappointment soon.
