September 24, 2007 - No. 146
Economic Turmoil in the Imperialist
System of States
The Dark World of International Usury --
British Depositors Remove Their Money
from Northern Rock
Economic Turmoil in the Imperialist
System of States
• The Dark
World of International Usury -- British Depositors Remove Their Money
from Northern Rock
• It's the Fees, Not the Profits:
Private-Equity Firms Make Far More Charging Investors, Says a Study
-Tennille Tracy, Wall Street Journal
• CEOs Deserve Their Pay - Robert
B. Reich, Wall Street Journal
Economic Turmoil in the Imperialist
System of States
The Dark World of International Usury --
British
Depositors Remove Their Money from
Northern Rock
Depositors in the British financial institution Northern
Rock took out over $6-billion of their money within a few days.
The mass media showed long lines of depositors waiting for a chance to
remove their money. Northern Rock's website warns of long waits to log
into the site.
Northern Rock is a major British moneylender and
borrower owning $226-billion in debts, which capital-centred accounting
considers assets, and owing billions to international lenders and
depositors.
The individual mortgages and other loans owed to
Northern Rock have become collateral on which the moneylender borrows
more money throughout the world, which it then uses to lend out to
individuals and businesses. Total deposits in Northern Rock have
financed and underwrite only a fraction
of the outstanding loans it owns. Most of the financing and
underwriting comes from international borrowing.
Northern Rock needed emergency government funding to
roll over outstanding short-term debt, as the system of international
usury is now in crisis.
The borrowing and lending involving Northern Rock and
international usury can go back several stages with each step of the
way dependent both on the borrower paying a regular amount of interest
and on new money being available to borrow to pay off previously
borrowed amounts as they become
due. Specific and general crises can erupt if borrowers at any level
are unable to meet regular payments or international moneylenders are
reluctant to lend more money to replace outstanding debt that is due.
This chaotic decaying system with parasites sucking in fees and
interest at each level is sustained by stealing
production from the international working class particularly the
oppressed in Asia, Africa and Latin America.
The crisis for Northern Rock began when it was unable to
borrow new money to pay off debts that were due, which is known as
rolling over debt or paying off old debt with new debt. The Bank of
England provided Northern Rock with funds to pay off old debt but this
very public signal of a financial
difficulty coupled with the international concern and uncertainty over
U.S. debts, its economy and the falling value of the U.S. dollar
generated a sense of unease and panic among Northern Rock depositors.
For the working class, concern for economic stability
and panic have to be transformed into a conscious determination to
bring the existing economic forces under the control of the human
factor/social consciousness. Workers are used to hearing that markets
control the economy and even control the
human factor through the labour market. Under this obsolete
relationship and perspective, things and phenomena such as the
marketplace, production and the economy itself control human beings and
determine their economic security. The working class perspective is
that the human factor must bring things and phenomena,
especially the economy on which everyone depends, under its conscious
control. The working class must acquire the consciousness of
controlling what it produces and not allow what it produces to fall out
of its control. This is a very human concept as it means bringing
production, the labour market and the modern
socialised economy under the conscious direction of human beings in a
similar manner to how humans have brought fire and other naturally
occurring things and phenomena under their conscious scientific
control. Panic in the face of fire is not human; it is a reversion to
base animal behaviour. Panic in the face of
economic forces is not human; it reduces the human factor to isolated
individuals bent on fending for themselves rather than dealing with the
natural and social phenomena in an organised conscious manner. The
working class
perspective is to bring the modern force of production of the
socialised economy under the conscious
organised control of the actual producers.
Mass
Media Spread Panic
Mass media spread panic The mass media have been full of
stories generating concern for the future of the economies within the
imperialist system of states. If the working class succumbs to panic
and does not reject the line of acting blindly, individually and
without organising itself into a collective
force, it will not be able to bring forward its perspective and
collective strength to deal with the situation in its favour.
An Associated Press headline reads "Concerns
Arise That British Lender's Problems May Lead to Greater Crisis of
Confidence." The article says, "The panic engulfing mortgage lender
Northern Rock PLC, Britain's fifth largest lender, may mark a watershed
in the British economy by undermining
the confidence of investors and consumers. The surprise and rapidity of
Northern Rock's plight have raised questions about how the potential
impact of the collapse of the U.S. subprime mortgage market on Britain
was so underrated. Pleas for calm from the government and the mortgage
lender itself again fell on
deaf ears, as Northern Rock customers desperate to withdraw savings
rejoined long lines outside its branches in Britain and Ireland. 'With
the Wall Street crash in the 1920s, people were frightened and
reluctant to put their money into banks so they kept it under their
mattresses,' said Roy Hornsby, 69, who was part
of a line of about 50 people in Newcastle. Spooked customers have
withdrawn 2 billion pounds ($4 billion) since early Friday, when
Northern Rock revealed that it had asked the central bank for emergency
funds and warned that its profits would take a big hit." Revealing the
greed and incoherence that drive the
international stock markets, Reuters reports, "US broker Merrill Lynch
cut its stance on Northern Rock to 'neutral' from 'buy' following
Friday's news that the Bank of England had offered it an emergency
lending facility. The broker believes the 'game is over for Northern
Rock in its present form' and said the sale
of the company, effective nationalization or radical restructuring are
the three possible outcomes of the current situation." Investors who
may have followed Merrill Lynch's "buy" Friday morning just before it
changed to "neutral" would have lost over thirty percent of their
investment.
A Reuters report reads, "'My grandfather called
me on Saturday and told me to take the money out of Northern Rock,'
student Jenny Price said Monday as she queued outside a branch in the
centre of Liverpool, northwest England. 'But I'm looking at the queue
now and wondering if there
will be enough cash in the branch to satisfy everyone'." The anecdotes
are designed to spread incoherence and a sense that its "everyone for
themselves." In the midst of the chaos, political leaders of the
parties in power and their bureaucrats make hollow appeals for calm and
reiterate the view that the economy is
basically sound and only needs a "correction" here or there, more
"transparency" and possibly better regulations. The leaders and mass
media then begin a contrived capital-centred debate with some on the
side of more regulation and others insisting that market forces will
correct the problems and should be left alone.
The main focus is to render the working class as victim and
anti-conscious spectator of its own fate struggling to save itself as
mostly helpless individuals.
Echoing the stand of finance ministers within the
imperialist system of states who regularly issue statements of
confidence, Reuters reports: "British finance minister Alistair Darling
voiced confidence Monday that the country's economy could weather the
storm surrounding the mortgage lender. He said
savers could withdraw their money but stressed that the British economy
was 'strong' and had low interest rates, which would allow politicians
and officials to 'deal with this particular problem'." This is the
normal warning to the working class not to concern itself with economic
and political affairs and certainly not
organise itself into an effective opposition to the ruling monopoly
capitalist class. Darling insists workers should leave the mysterious
ups and downs of the economy to professional politicians, economists
and executive managers who know best how to "deal with particular
problems." The soothing words of finance
ministers such as Darling and Canada's Flaherty should be rejected and
the real basis of the economic turmoil confronted from a working class
perspective with the people becoming involved in an organised way to
defend their economic security.
Government
Intervenes
Public insurance of deposits is
limited in Britain to the full amount up to the first 2,000 pounds, 90
percent of the next 33,000 and nothing over 35,000 pounds. By September
17, Northern Rock depositors continued to remove their money so the
Bank of England announced that
all deposits in Northern Rock would be fully insured against risk.
The government bailout of Northern Rock through lending
it money and guaranteeing deposits is to save not only particular
monopoly capitalists but the system itself from imploding under the
weight of its unidentified numerous contradictions. The deposits
themselves are not a major issue as they represent
only a fraction of the debt owed and owned by Northern Rock. The
government's manoeuvres are designed to keep the initiative out of the
hands of the working class to defend itself and its economic security
in the face of a growing international economic crisis. The main
contradiction that must be resolved is that
of a socialised economy where all the wealth is produced by the working
class but is owned and controlled by private cliques of monopolies and
rich individuals. Those cliques of monopolies and rich individuals do
not want the working class to bring its conscious organised strength to
bear on the economy. The
control of the state by the rich stands in the way of the working class
bringing harmony to
its own modern socialised economy.
The long line-ups to withdraw deposits at Northern Rock
indicate a lack of confidence of those directly affected who worry
about their economic security. The line-ups also represent a deep
concern on the part of the working class that a difficult economic
recession or worse is looming and workers
feel powerless to do anything about it. Workers throughout the
imperialist system of states, which includes Canada, do not yet realise
the enormous power they have to challenge the monopolies on each and
every issue, if they get organised and take conscious actions from
their own perspective. Workers' economic
security can only be guaranteed by themselves organising and taking
conscious action to restrict the monopolies and defend the rights of
all and by working out the ways and means to come to power themselves.
Monopoly
Media Comments on the Economic Turmoil in Britain
From AFP
The rush by Northern Rock depositors to claim their
savings came despite assurances from politicians, regulators and the
bank itself that it could withstand the global credit squeeze.
Northern Rock provides one in 13 British home loans.
In an unprecedented move late on Monday, Alistair
Darling, Britain's finance minister, said the Bank of England would
guarantee all deposits held by Northern Rock.
"I do recognise that people are concerned, that's why we
have put the matter beyond all doubt," Darling said at a news
conference after a meeting with Henry Paulson, the U.S. treasury
secretary.
However, account holders remained worried. About 50
people were waiting for the Northern Rock branch in
Kingston-upon-Thames in southwest London before it opened at 8am. "I
don't know what we will do with the money yet, but I don't trust what
the government says," said Doria Watson. "We
were here yesterday but were told we had no chance of getting in, so we
are back today and will wait as long as we have to."
The bank is the first major British financial
institution to be hit severely by the global credit crunch sparked last
month by a crisis in the U.S. subprime, or high-risk, mortgage sector.
Meanwhile, Australia's central bank has denied
speculation that banks there had sought emergency funds. The Reserve
Bank of Australia, which has pumped billions of dollars into money
markets as lending dried up, quickly denied speculation that one or
more regional banks were seeking emergency
funding. "Those rumours are false," said Ric Battellino, Reserve Bank
of Australia's deputy governor. The rumours drove the Australian dollar
lower and hurt shares of several regional Australian banks.
From Reuters
The European Central Bank's efforts to restore
confidence to credit markets by pumping in liquidity are unlikely to
succeed, Bank of Canada Governor David Dodge was quoted as saying on
Friday. "I'm not sure practically, whether it would do anything," Dodge
told the Financial Times in
an interview,
referring to the ECB's issuing of billions of euros in three-month
money.
A new business model adopted by banks of arranging loans
and then parcelling out the risk among investors was flawed because
those selling loans did not have enough incentive to make sure
borrowers paid them back, said Mr. Dodge.
Britain's financial authorities stepped in to rescue
mortgage lender Northern Rock on Friday as the group, which has lent
aggressively to home buyers, fell victim to the sharp rise in borrowing
costs between banks. In Britain's biggest casualty of a global
financial crisis sparked by U.S. mortgage defaults,
queues stretched out into the streets as customers waited to withdraw
savings from Northern Rock branches, with some reports of fighting in
its home town of Newcastle. The British central bank's support - the
first time it has acted as lender of last resort in this way since
becoming independent on interest rate policy
in 1997 - puts a prop under Northern Rock, which has been hit by banks'
reluctance to lend as they hoard cash to cope with the fallout from bad
U.S. loans. The British government said on Friday it had authorized the
Bank of England to provide an unspecified amount of liquidity to
Northern Rock, which had the
biggest share of the new mortgage market in the first half of this year.
Finance Minister Alistair Darling told BBC Radio that
Northern Rock was the only institution to have called for BoE aid and
that Britain's economy and banking system was sound. "There is plenty
of money in the system, the banks have got money ... they are simply
not lending in the short-term way
that institutions like Northern Rock need," he said.
Northern Rock's exposure to poorer-quality, or
"subprime," U.S. mortgages, represents just 0.24 per cent of its total
assets. But it has proved vulnerable to the liquidity squeeze triggered
by the crisis because it has a small deposit base and so has to draw
most of its funding from money markets.
Inter-bank lending costs rose to their highest level for
nine years this week as banks scaled back lending to each other.
Northern Rock declined to comment on the details of the
financial support, though Chief Executive Adam Applegarth told
reporters that "clearly a substantial amount is required" and that it
would be charged a penalty interest rate.
Other banks, like Barclays, have obtained overnight
funding under the BoE's standing emergency lending facilities, but the
package for Northern Rock was the first time the BoE has been called on
for longer-term help during the current crisis.
Britain's Council of Mortgage Lenders urged calm.
"Consumers need to understand that the problem for lenders generally at
the moment is in raising funds, not in lending quality," a statement
said, welcoming the BoE's intervention.
From Associated Press
The global credit crisis struck a leading British
mortgage lender, forcing the Bank of England to provide Northern Rock
PLC emergency funding to shore up the bank.
"I would not put a penny into that company again," said
Tony Looch, a 68-year-old customer, who withdrew his savings after
standing in line for nearly two hours outside a branch in central
London. "There are a lot of older people who must be really scared."
The bank has been unable to raise funds since last month
when the wholesale money markets it relied on for cash choked up.
Northern Rock CEO Applegarth said the problem was likely to continue
for the rest of the year as bad U.S. loans continue to rattle the
market.
"We can't tell when the global (credit)
freeze is going to unwind. On that basis, it made sense to get this
facility now," he told Sky News. He did not disclose how much the bank
had borrowed [from the BofE].
Northern Rock holds 113 billion pounds ($226 billion) in
assets (mostly outstanding debts such as mortgages, car loans etc).
Britain's treasury chief Alistair Darling said there was
no threat of insolvency at the bank and urged customers not to panic.
"There's plenty of money in the system," he said. "All the banks have
money, but at the moment they're not lending to each other in the way
they usually do." "This isn't about
solvency, this is about a short-term problem that the Northern Rock has
in getting liquidity -- that is, getting some cash from the normal
interbank lending market," said Angela Knight, chief executive of the
British Bankers' Association.
The Bank of England's intervention is the first of its
kind since it assumed the role of "lender of last resort" when it was
made independent from the British government in 1997.
From British newspaper The
Guardian
The government last night issued an emergency pledge to
Northern Rock savers that their money is safe, after a third day of
queues outside branches threatened to spread across the banking system.
Northern Rock's shares shed a third of their value yesterday and the
sense of crisis heightened as shares
in rival mortgage lenders dropped sharply - Alliance & Leicester by
a third and Bradford & Bingley by 15%. The falls raised fears that
the contagion from Northern Rock was starting to spread through the
financial system.
There were angry scenes when savers were turned away at
6pm as Northern Rock branches closed Monday. Malcolm Purcell, queuing
outside the Moorgate branch in London for seven hours, said: "It's
absolutely dreadful."
Withdrawals are now estimated at £3bn (over
$6-billion) in three days, equivalent to an eighth of the bank's
deposits. Yesterday its shares dropped 155p, or more than 35%, to 283p,
from a £12.58 high in February this year.
Alliance & Leicester issued a statement saying it
had not sought Bank of England help, insisting its business was sound
and that it had no idea why its share price had dropped so fast.
The City (London) fears a lack of confidence in other
banks using Northern Rock's model of relying on short-term funds from
money markets to cover long-term mortgage loans. Global fears over the
British banking system and economy grew, and sterling fell back below
$2.
The government, Bank of England and FSA were trying to
find a buyer for Northern Rock last night. Sources said there was
intense activity but there were no indications that a buyer had yet
come forward in spite of the big falls in its share price. The Northern
Rock name is thought unlikely to survive
any buyout.
At a conference at accountants KPMG, Conservative leader
David Cameron said: "This government has presided over a huge expansion
of public and private debt without showing awareness of the risks
involved. Under Labour our economic growth has been built on a mountain
of debt. And as any
family with debts knows, higher debt makes us more vulnerable to the
unexpected."
Speaking at the Lib Dems' annual conference, the party's
Treasury spokesman Vince Cable said he had warned Mr Brown of a looming
debt crisis four years ago.
The British prime minister and Mr Darling last night
held talks with U.S. Treasury Secretary Henry Paulson to discuss the
global credit crunch.
It's the Fees, Not the Profits
Private-Equity Firms Make Far More Charging Investors,
Says a Study
-Tennille Tracy, Wall Street Journal,
September 13, 2007 -
Private-equity firms say they are experts at wringing
profits out of flagging businesses. It turns out they are almost twice
as good at wringing fees out of their investors.
This finding -- part of a study by two professors at the
University of Pennsylvania's Wharton School -- upends one of the
deepest-held notions about the buyout business: The bulk of the average
private-equity firm's earnings come from profitably refashioning and
reselling the businesses it buys.
The study shows that, on average, leveraged-buyout funds
can expect to collect $10.35 in management fees for every $100 they
manage. In comparison, slightly more than half as much -- $5.41 for
every $100 -- comes from carried interest.
Carried interest represents the 20% cut of any profit
that buyout firms retain for themselves after auctioning off a company,
getting dividends from a portfolio company or selling all or some of a
company in an initial public offering of stock.
The Wharton study draws from a unique trove of data, the
actual performance records of a large institutional investor in
private-equity funds. That investor shared data from 144 separate
buyout funds from 1992 to 2006, with authors Andrew Metrick and Ayako
Yasuda, both Wharton professors of
finance.
Using a model that takes into account various structures
used in private-equity funds, the authors embarked on the study to
determine how private-equity firms could maximize their revenue
streams. It is one of the first times this industry's wealth has been
so closely scrutinized.
The study's conclusions put the buyout industry in an
agonizing spot. While the data could buttress efforts to resist a
congressional push for greater taxation of some private-equity profits,
they also could anger the industry's investors, who have been griping
about what they say are high fees for years.
In the 1980s, fledgling private-equity firms -- with
funds rarely topping a few hundred million dollars -- charged investors
a fee of 2% to 3% of cash under management. The fees were to "keep on
the lights" -- to pay the rent and hire assistants -- before their
funds generated any profit.
Since then, multibillion-dollar funds have become
common, and that management fee has evolved into a lucrative source of
revenue. A $10 billion fund can generate $200 million a year for a
private-equity firm just in management fees.
Stunned in Boston
"The stunning thing is that the terms stayed the same
even as the funds got bigger," said John LeClaire, chairman of the
private-equity group at the Boston law firm Goodwin Procter LLP.
Private-equity firms are able to command the same fees
they charged two decades ago largely because they consistently
outperform the public markets, sometimes by a wide margin.
Investors occasionally balk, but, in the end, have
little recourse but to cough up the annual charges or risk being
squeezed out of the fund.
The study's findings apply to an "average" firm.
Top-performing firms will buck that trend. Given the
lucrative profit the top performers generate from their deals, they
take in far more in total dollars in carried interest than in fees.
The Wharton report could influence the Capitol Hill
debate over private-equity firms' taxes. Some lawmakers have accused
private-equity firms of dodging taxes by classifying their
carried-interest revenue as capital gains, which is taxed at a 15%
rate, rather than as income, which is taxed at 35%.
Not surprisingly, the public-pension systems and
university endowments that invest huge sums in private-equity funds --
$261 billion in 2006 alone -- have awakened to the disparity between
fee revenue and carried-interest revenue.
They have pressed firms to reduce their management fees,
saying fund managers could lose the motivation to do good deals if they
collect so much money in fees.
The Later Years
Some firms reduce management fees in the later years of
a fund's life -- typically lasting for roughly 10 years -- and give
what amounts to a volume discount, via co-investment funds. This is
additional money a fund's investors are allowed to put into a specific
transaction without
paying extra fees.
Investors have had little luck in winning broad changes
in the fee structure. Some 57% of all buyout firms continue to charge a
2% management fee, with another 31% charging 1.5% to 2% of assets,
according to the 2007 Private Equity Analyst Terms & Conditions
Report, which is published by Dow
Jones & Co., publisher of The
Wall Street Journal.
'They Make So Much'
"They make so much money in management fees," said Chris
Wagner, senior investment officer of the $41 billion Los Angeles County
Employees Retirement Association, "you have to wonder if they're going
to be as focused on their deals."
The pace of private-equity deal making slowed almost to
a halt in August, according to data tracker Dealogic. With their funds
sitting stagnant, private-equity firms could reduce the size of their
existing and future funds, much as venture-capital firms did early this
decade.
The lure of billions of dollars in management fees
suggests that won't be the case. Buyout firms are more likely to
continue to deploy high levels of capital and pursue deals that don't
rely so heavily on the sale of debt for financing, typically for 70% of
the purchase price. Of course, that would only
bring down carried-interest returns, making management fees an even
bigger percentage of total income for the funds.
CEOs Deserve Their Pay
- Robert B. Reich*, Wall Street Journal,
September 14, 2007 -
According to research published recently by the
Washington-based Institute for Policy Studies, the 20 highest-paid
corporate executives earned on average $36 million in total
compensation last year. The typical CEO of a Fortune 500 company didn't
do quite as well, but at $10.8 million didn't do so badly -- that's
more than 364 times the pay of an average employee. Forty years ago,
top CEOs earned 20 to 30 times what average workers earned.
The trend has ignited a flurry of attention in
Washington. Last year the Securities and Exchange Commission ordered
companies to reveal more detail about executive pay, but it's still
hard for investors to decipher what companies disclose. SEC chairman
Christopher Cox recently complained that a
typical remuneration report is "as tough to read as a Ph.D.
dissertation." In April, the House approved a proposal for a mandatory
"say on pay" vote by shareholders. Although the White House opposes it
and it has little chance of becoming law, expect Democrats to hammer
away at the theme this election year.
Hold on.
There's an economic case for the stratospheric level of
CEO pay which suggests shareholders -- even if they had full say --
would not reduce it. In fact, they're likely to let CEO pay continue to
soar. That's because of a fundamental shift in the structure of the
economy over the last four decades, from
oligopolistic capitalism to super-competitive capitalism. CEO pay has
risen astronomically over the interval, but so have investor returns.
The CEO of a big corporation 40 years ago was mostly a
bureaucrat in charge of a large, high-volume production system whose
rules were standardized and whose competitors were docile. It was the
era of stable oligopolies, big unions, predictable markets and
lackluster share performance. The CEO
of a modern company is in a different situation. Oligopolies are mostly
gone and entry barriers are low. Rivals are impinging all the time --
threatening to lure away consumers all too willing to be lured away,
and threatening to hijack investors eager to jump ship at the slightest
hint of an upturn in a rival's share
price.
Worse yet, any given company's rivals can plug into
similar global supply and distribution chains. They have access to
low-cost suppliers from all over the world and can outsource jobs
abroad as readily as their competitors. They can streamline their
operations with equally efficient software culled
from many of the same vendors. They can get capital for new investment
on much the same terms. And they can gain access to distribution
channels that are no less efficient, some of them even identical.
So how does the modern corporation attract and keep
consumers and investors (who also have better and better comparative
information)? How does it distinguish itself? More and more, that
depends on its CEO -- who has to be sufficiently clever, ruthless and
driven to find and pull the levers that
will deliver competitive advantage.
There are no standard textbook moves, no
well-established strategies to draw upon. If there were, rivals would
already be using them. The pool of proven talent is small because so
few executives have been tested and succeeded. And the boards of major
companies do not want to risk error. The cost
of recruiting the wrong person can be very large -- and readily
apparent in the deteriorating value of a company's shares. Boards are
willing to pay more and more for CEOs and other top executives because
their rivals are paying more and more for them. Former Home Depot CEO
Robert Nardelli to the contrary
notwithstanding, the pay is usually worth it to investors.
The proof is in the numbers. Between 1980 and 2003, the
average CEO in America's 500 largest companies rose sixfold, adjusted
for inflation. Outrageous? Not to investors. The average value of those
500 companies also rose by a factor of six, adjusted for inflation. In
2005, for example, Exxon Mobil
reported $36 billion in profits. Its former chairman, Lee R. Raymond,
retired that year with a compensation package totaling almost $400
million, including stock, stock options and long-term compensation. Too
much? Not to Exxon's investors, who enjoyed a 223% return over the
interval, compared to the average
205% return received by shareholders of other oil companies, a premium
of about $16 billion. Raymond took home just 4% of that $16 billion.
As the economy has shifted toward supercapitalism, CEOs
have become less like top bureaucrats and more like Hollywood
celebrities who get a share of the house. Hollywood's most popular
celebrities now pull in around 15% of whatever the studios take in at
the box office. Clark Gable earned $100,000
a picture in the 1940s, roughly $800,000 in present dollars. But that
was when Hollywood was dominated by big-studio oligopolies. Today, Tom
Hanks makes closer to $20 million per film.
Movie studios -- now competing intensely not only with
one another but with every other form of entertainment -- willingly pay
these sums because they're still small compared to the money these
stars bring in and the profits they generate. Today's big companies are
paying their CEOs mammoth sums
for much the same reason.
If you assume shareholders would rein in CEO pay, take a
look at the United Kingdom. Since 2003, changes in British securities
law have given investors more say over what British CEOs are paid.
Nonetheless, executive pay there has continued to skyrocket, on the way
to matching the pay of American
CEOs.
Companies listed on the London stock market have done
sufficiently well that British investors don't care what CEOs are paid.
Full disclosure with shareholder approval might make it harder for a
CEO to claim to be worth it if his company's shares have lost ground
during his tenure or risen no more
than the average share prices of other companies in the same industry.
But given the intensity of competition for star performers, disclosure
and approval might cause CEO pay to soar even higher.
This economic explanation for sky-high CEO pay does not
justify it socially or morally. It only means that investors think CEOs
are worth it. As citizens, though, most of us disapprove. About 80% of
Americans polled by the Los Angeles
Times and Bloomberg in early 2006
said CEOs are overpaid.
The reaction was roughly the same regardless of the respondent's income
or political affiliation. But if America wants to rein in executive
pay, the answer isn't more shareholder rights. Just as with the
compensation of Hollywood celebrities or private-equity and hedge fund
managers, the answer -- for anyone truly
concerned -- is a higher marginal tax rate on the super pay of those in
super demand.
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