When did the great executive stock option hog wallow really start? You
can go back to the deregulatory push under Carter in the late 1970s,
then move into the Reagan '80s, when corporate purchases of shares
really took off with the leveraged buyouts and mergermania, assisted by
tax laws that favored capital gains over stockholder dividends and
allowed corporations to write off interest payments entirely.
Between 1983 and 1990, 72.5 percent of net US equity purchases were
bought by nonfinancial corporations. At the end of this spree the
debt-laden corporations withdrew to their tents for three years of
necessary restraint and repose, until in 1994 they roared into action
once more, plunging themselves into debt to finance their share
purchases. This was the start of the options game.
Between 1994 and 1998 nonfinancial companies began to load themselves up
with yet more debt. The annual value of the repurchases quadrupled,
testimony to the most hectic sustained orgy of self-aggrandizement by an
executive class in the history of capitalism.
For these and ensuing reflections and specific figures, I'm mostly
indebted to Robert Brenner's prescient The Boom and the Bubble,
published this spring with impeccable timing by Verso; also Robin
Blackburn's long-awaited book (now being released by Verso) on the past
and future of pensions, Banking on Death.
Why did these chief executive officers, chief financial officers and
boards of directors choose to burden their companies with debt? Since
stock prices were going up, companies needing money could have raised
funds by issuing shares rather than borrowing money to buy shares back.
Top corporate officers stood to make vast killings on their options, and
by the unstinting efforts of legislators such as Senator Joe Lieberman,
they were spared the inconvenience of having to report to stockholders
the cost of these same options. Enlightened legislators had also been
thoughtful enough to rewrite the tax laws in such a manner that the cost
of issuing stock options could be deducted from company income.
It's fun these days to read all the jubilant punditeers who favor the
Democrats now lashing Bush and Cheney for the way they made their
fortunes while repining the glories of the Clinton boom, when the dollar
was mighty and the middle classes gazed into their 401(k) nest eggs with
the devotion of Volpone eyeing his trove. "Good morning to the day; and,
next, my gold:/Open the shrine, that I may see my saint."
Bush and Cheney deserve the punishment. But when it comes to political
parties, the seaminess is seamless. The Clinton boom was lofted in large
part by the helium of bubble accountancy.
By the end of 1999 average annual pay of CEOs at 362 of America's
largest corporations had swollen to $12.4 million, six times more than
what it was in 1990. The top option payout was to Charles Wang, boss of
Computer Associates International, who got $650 million in restricted
shares, towering far above Ken Lay's scrawny salary of $5.4 million and
shares worth $49 million. As the 1990s blew themselves out, the
corporate culture, applauded on a weekly basis by such bullfrogs of the
bubble as Thomas Friedman, saw average CEO pay at those same 362
corporations rise to a level 475 times larger than that of the average
The executive suites of America's largest companies became a vast hog
wallow. CEOs and finance officers would borrow millions from some
complicit bank, using the money to drive up company stock prices,
thereby inflating the value of their options. Brenner offers us the
memorable figure of $1.22 trillion as the total of borrowing by
nonfinancial corporations between 1994 and 1999, inclusive. Of that sum,
corporations used just 15.3 percent for capital expenditures. They used
57 percent of it, or $697.4 billion, to buy back stock and thus enrich
themselves. Surely the wildest smash and grab in the annals of corporate
When the bubble burst, the parachutes opened, golden in a darkening sky.
Blackburn cites the packages of two departing Lucent executives, Richard
McGinn and Deborah Hopkins, a CFO. Whereas the laying off of 10,500
employees was dealt with in less than a page of Lucent's quarterly
report in August 2001, it took a fifteen-page attachment to outline the
treasures allotted to McGinn (just under $13 million, after running
Lucent for barely three years) and to Hopkins (at Lucent for less than a
year, departing with almost $5 million).
Makes your blood boil, doesn't it? Isn't it time we had a "New Covenant
for economic change that empowers people"? Aye to that! "Never again
should Washington reward those who speculate in paper, instead of those
who put people first." Hurrah! Whistle the tune and memorize the words
(Bill Clinton's in 1992).
There are villains in this story, an entire piranha-elite. And there are
victims, the people whose pension funds were pumped dry to flood the hog
wallow with loot. Here in the United States privatization of Social
Security has been staved off only because Clinton couldn't keep his hand
from his zipper, and now again because Bush's credentials as a voucher
for the ethics of private enterprise have taken a fierce beating.
But the wolves will be back, and popgun populism (a brawnier SEC, etc.,
etc.) won't hold them off. The Democrats will no more defend the people
from the predations of capital than they will protect the Bill of Rights
(in the most recent snoop bill pushed through the House, only three
voted against a measure that allows life sentences for "malicious
hacking": Dennis Kucinich and two Republicans, Jeff Miller of Florida
and the great Texas libertarian, Ron Paul). It was the Senate Democrats
in early July who rallied in defense of accounting "principles" that
permitted the present deceptive treatment of stock options. Not just Joe
Lieberman, the whore of Connecticut, but Tom Daschle of the Northern
Popgun populism is not enough. Socialize accumulation! Details soon.
Events in Washington are potentially momentous, but hold the applause.
In late May, the Dow was at 10,300, but by mid-July it had dropped
almost 2,000 points. The Nasdaq and S&P indexes are at zero gain for
the past five years, as if the bubble never occurred. This slow-motion
crash induced even the most obedient right-wing lapdogs to scurry aboard
the Sarbanes reform bill, and the Senate passed it, 97-0. The President
made two malaprop-laced pep talks to recast himself as Mr. Reformer Guy
(and knocked another 500 points off the Dow). But W. is a lagging
political indicator these days. Even Federal Reserve Chairman Alan
Greenspan has lost his touch. For years he celebrated the new economy
and refused to take any action that might have worked to curb its
excesses; a bit late he tells us "irrational exuberance" was actually
"infectious greed." Now, with fear overtaking that greed in the markets
and thus in Washington, the ingredients are present for an ideological
sea change in American politics. But not yet.
Democrats, newly awakened to the potency of Enron-like financial
scandals, are throwing smart punches at the business-friendly White
House, but they are six months late to the cause (and still sound less
convinced than Republican maverick John McCain). The passage of Senator
Sarbanes's legislation is meaningful, but Democratic leaders choked on
the hard part--reforming stock options and giving workers a voice in
managing their own pension savings. Why mess up fundraising with those
high-tech companies dumping "New Dem" millions on the party of working
people? Majority leader Tom Daschle, who lamely promised a vote
(someday) on the stock-option issue, will be revealed as another limp
corporate shmoozer if he fails to deliver. So far, the Coca-Cola
directors have more courage than he. Likewise, Senator Joseph Lieberman
can doubtless raise millions from Silicon Valley for his presidential
ambitions by defending the corporate hogs but, if so, he should rethink
which party will have him.
The Republicans are in a deeper hole, of course. If Bush wants to bring
his much-touted "moral clarity" to the reform cause, he'll have to drop
the weepy speeches and dump Harvey Pitt as SEC chairman and Tom White,
the Enronized Army Secretary. Then Bush should take his own medicine and
come clean, open the secret SEC records of his insider cashout as a
director of Harken, and do the same for the SEC investigation of Vice
President Cheney's stewardship as CEO of Halliburton. Republican zealots
and their attack-dog newspaper, the Wall Street Journal,
exhausted the nation with their pursuit of the Clintons on Whitewater.
Stonewalling by the Bush White House promises to make these far more
serious financial matters a permanent theme of the Bush presidency.
The reforms currently in motion are a good start, but no more, as
William Greider notes on page 11. We know what to expect from the
Republicans--stubborn maneuvering and guile designed to stall real
change until (they hope) the stock market turns around and public anger
subsides. But Democrats have a historic opening far greater than this
fall's elections--the opportunity to revive their role as trustworthy
defenders of the folks who have always been the bone and sinew of the
party, the people who do not get stock options and who deserve a much
larger voice in Washington. If Democrats take a pass on the facts before
them, they deserve our scorn. If they find the courage to break out of
the corporate-money straitjacket and once again speak for the public,
this could be the beginning of something big.
The Africa trip of Treasury Secretary Paul O'Neill and Irish rock star
Bono produced a bumper harvest of photo ops and articles about aid to
Africa. Unfortunately, media coverage was mired in the perennial and
stale aid debate: Should we give more? Does it work?
If the O'Neill-Bono safari resulted in Washington finally paying more of
its proper share for global health, education and clean water, that
would be cause for applause. But any real change requires shifting the
terms of debate. Indeed, the term "aid" itself carries the patronizing
connotation of charity and a division of the world into "donors" and
At the late June meeting in Canada of the rich countries known as the
G8, aid to Africa will be high on the agenda. But behind the rhetoric,
there is little new money--as evidenced by the just-announced paltry sum
of US funding for AIDS--and even less new thinking. Despite the new
mantra of "partnership," the current aid system, in which agencies like
the World Bank and the US Treasury decide what is good for the poor,
reflects the system of global apartheid that is itself the problem.
There is an urgent need to pay for such global public needs as the
battles against AIDS and poverty by increasing the flow of real
resources from rich to poor. But the old rationales and the old aid
system will not do. Granted, some individuals and programs within that
system make real contributions. But they are undermined by the negative
effects of top-down aid and the policies imposed with it.
For a real partnership, the concept of "aid" should be replaced by a
common obligation to finance international public investment for common
needs. Rich countries should pay their fair share based on their
privileged place in the world economy. At the global level, just as
within societies, stacked economic rules unjustly reward some and punish
others, making compensatory public action essential. Reparations to
repair the damage from five centuries of exploitation, racism and
violence are long overdue. Even for those who dismiss such reasoning as
moralizing, the argument of self-interest should be enough. There will
be no security for the rich unless the fruits of the global economy are
shared more equitably.
As former World Bank official Joseph Stiglitz recently remarked in the
New York Review of Books, it is "a peculiar world, in which the
poor countries are in effect subsidizing the richest country, which
happens, at the same time, to be among the stingiest in giving
assistance in the world."
One prerequisite for new thinking about questions like "Does aid work?"
is a correct definition of the term itself. Funds from US Agency for
International Development, or the World Bank often go not for economic
development but to prop up clients, dispose of agricultural surpluses,
impose right-wing economic policies mislabeled "reform" or simply to
recycle old debts. Why should money transfers like these be counted as
aid? This kind of "aid" undermines development and promotes repression
and violence in poor countries.
Money aimed at reaching agreed development goals like health, education
and agricultural development could more accurately be called
"international public investment." Of course, such investment should be
monitored to make sure that it achieves results and is not mismanaged or
siphoned off by corrupt officials. But mechanisms to do this must break
with the vertical donor-recipient dichotomy. Monitoring should not be
monopolized by the US Treasury or the World Bank. Instead, the primary
responsibility should be lodged with vigilant elected representatives,
civil society and media in countries where the money is spent, aided by
greater transparency among the "development partners."
One well-established example of what is possible is the UN's Capital
Development Fund, which is highly rated for its effective support for
local public investment backed by participatory governance. Another is
the new Global Fund to Fight AIDS, Tuberculosis & Malaria, which has
already demonstrated the potential for opening up decision-making to
public scrutiny. Its governing board includes both "donor" and
"recipient" countries, as well as representatives of affected groups. A
lively online debate among activists feeds into the official
Funding for agencies like these is now by "voluntary" donor
contributions. This must change. Transfers from rich to poor should be
institutionalized within what should ultimately be a redistributive tax
system that functions across national boundaries, like payments within
the European Union.
There is no immediate prospect for applying such a system worldwide.
Activists can make a start, however, by setting up standards that rich
countries should meet. AIDS activists, for example, have calculated the
fair contribution each country should make to the Global AIDS Fund (see
Initiatives like the Global AIDS Fund show that alternatives are
possible. Procedures for defining objectives and reviewing results
should be built from the bottom up and opened up to democratic scrutiny.
Instead of abstract debates about whether "aid" works, rich countries
should come up with the money now for real needs. That's not "aid," it's
just a common-sense public investment.
An odd thing has happened in the obscure but spirited fight activists
are waging against NAFTA's notorious Chapter 11 and the exclusive legal
privileges it gives to multinational investors. The Chapter 11
opposition is going mainstream and respectable. Not so long ago, the
only folks raising the alarm were globalization critics like Public
Citizen's Global Trade Watch or the Sierra Club--people the Wall
Street Journal likes to describe as "Luddite wackos." But what will
the Journal's editorial writers say about the National
Association of Attorneys General? Or the National League of Cities, the
US Conference of Mayors and the National Conference of State
Legislatures? These organizations and some others have studied what the
critics say about Chapter 11's true meaning and concluded, Good grief,
they're right! This so-called "investor protection" poses a fundamental
threat to state and local governments' ability to enact laws that
protect the public's health and general welfare.
The issue is currently in play again because the Bush Administration
(and all right-thinking free-trade cheerleaders) is pushing to expand
the same doctrine in the proposed Free Trade Area of the Americas and
asking Congress for blank-check authority to negotiate (better known as
"fast track"). But this time Congressional skepticism is alive and
growing, stoked partly by the prestigious, bipartisan expressions of
concern. Chapter 11 was a sleeper provision in NAFTA that essentially
established a private court for capital--secretive arbitration tribunals
where corporations can bring suits for huge damage claims against the
United States, Canada or Mexico over new regulatory laws or other
actions that may crimp their profit-making. Chapter 11 borrows
property-rights language from the US right wing's domestic "takings"
movement and goes far beyond settled US legal doctrine [see Greider,
"How the Right Is Using Trade Law to Overturn American Democracy,"
October 15, 2001]. That is what alarms the state and local officials.
The Conference of Chief Justices from state Supreme Courts is also
expected to weigh in on the sovereignty issue.
Senator John Kerry is leading the fight for a corrective fast-track
amendment that would instruct the Administration not to negotiate any
new agreement that gives foreign investors greater rights than US
citizens. As a possible presidential candidate, Kerry has a big
problem--he has been an unblinking supporter of trade agreements, so he
has to show environmentalists and labor that he's not totally owned by
the multinationals. If his measure prevails, fast track must go back to
the House, where it was passed by only one vote in December. The
legislative action in any case educates and builds momentum for the
longer fight against these investor-dictated rules stealthily imposed by
so-called free-trade agreements.
The trouble with Kerry's amendment--and with fast-track authority in
general--is that these legislative instructions are really no more than
limp-wristed guidance. The negotiators can ignore Congress, as they have
in the past, and probably get away with it. A pending amendment with
much more bite, first proposed by Charles Rangel and Sander Levin in the
House, would create a mechanism for genuine Congressional leverage over
trade negotiations: the right of either chamber to force a vote on
withdrawing fast-track approval if the negotiators are straying from
their instructions. That would begin to bring daylight and
accountability to the murky politics of globalization. It would also
restore responsibility to where the Constitution says it belongs--in
Congress, not the White House.
How are we to read the International Conference on Financing for Development, which recently concluded in Monterrey, Mexico? Just another United Nations talkathon?
On the eve of George W. Bush's recent tour of Latin America, Mexican writer Carlos Fuentes equated the advantages of a global free market with the peaks of the Himalayas, characterizing them as summits so inaccessible that the poor cannot even see them, let alone scale them. Fifteen years of US-prescribed free markets and trade liberalization in Latin America have generated an average annual growth rate of only 1.5 percent, far short of the 4 percent needed to make a serious dent in poverty levels. Add to that the Mexican peso meltdown of 1994, economic stagnation in Central America, the Brazilian currency crisis of three years ago, the political and economic collapse of Peru, endless war in Colombia, coup jitters in Venezuela and the staggering crash in Argentina, and one can understand Fuentes's pessimism.
"Trade means jobs," Bush said as he met with regional leaders and promised a harvest of benefits from his proposed Free Trade Area of the Americas (FTAA)--a thirty-two-nation pact Washington hopes to implement by 2005. But for all Bush's talk of a prosperous hemispheric future, his policy initiatives are mired in a cold war past. The Administration has just anointed a former Oliver North networker and interventionist hawk, Otto Reich, to head the State Department's Latin America section. And much as in the days of the Reagan wars in Central America that Reich helped promote, the Bushies seem to believe that the region's ills are better solved by guns than butter. No sooner had Washington signed off on the sale of a new fleet of F-16s to Chile (ending a two-decade ban on sophisticated-weapons sales to Latin America) than the Administration began asking Congress to increase military aid to Colombia and to lift all restrictions on its use. Those critics who argued that the $1.3 billion antidrug "Plan Colombia" would suffer mission creep and inevitably morph into a prolonged counterinsurgency war are now seeing their darkest fears confirmed.
On the economic front, Bush offered little more than warmed-over trickle-down Reaganomics to a continent in desperate need of a lift from the bottom up (the three countries he visited--Mexico, Peru and El Salvador--all suffer poverty rates of 50 percent or more). Certainly not lost on his Latin American audiences was the one-sided nature of the free trade offered by Bush. For nearly two decades now, Latin Americans have been told that by adhering to the "Washington Consensus" of market liberalization they will be able to partake of the rich American pie. But the cold fact is that the US market has remained closed to a cornucopia of Latin American goods.
Some remedy was found in the past decade's Andean Trade Preference Act, designed to lure impoverished Latin Americans away from local drug economies by allowing them to freely export a list of 4,000 goods into the United States. But since ATPA expired last year, the Senate and the White House have balked at its reauthorization because of protectionist pressure from conservative, primarily Southern, textile and agriculture interests. Its reinstatement could shift 100,000 farmers in Peru alone from coca to cotton cultivation.
Washington's refusal to depart from such unequal and inflexible models has--unwittingly--provoked some positive alternative stirrings. The use of armored cars and tear gas barrages in downtown Lima during the US-Peruvian presidential meeting was an official acknowledgment of the growing restlessness with the status quo. Newly elected President Alejandro Toledo has seen his popularity plummet to 25 percent as he has failed to offer economic alternatives. In Brazil center-left candidate Luiz Ignacio "Lula" Da Silva leads in this fall's presidential polls and vows to block the FTAA if elected. Even the incumbent, more conservative, President Enrique Cardoso has begun to steer Brazil toward more independence from Washington. It's still too early to predict how the developing debacle in Argentina will play out.
Finally, El Salvador, where Bush ended his Latin American tour, couldn't have provided a more fitting showcase for the current disjuncture between Washington and its southern neighbors. During the 1980s the United States was willing to spend billions to fight a war against leftist insurgents and promised a bright, democratic future. That conflict was settled ten years ago with a pact that opened up the political system but did nothing to address the social ills that provoked the war in the first place. And once the guerrillas were disarmed, Washington lost interest; in the past decade US aid has been reduced to a paltry $25 million a year. Today El Salvador languishes with vast unemployment, radical economic disparities and a murder rate forty times higher than that of the United States.
Democrats like California Assembly Speaker Antonio Villaraigosa are probably right when they claim that Bush's trip was aimed more at luring the domestic Latino vote than at building bridges to the South. During his 2000 campaign, Bush excoriated Bill Clinton for squandering a chance to improve relations with Latin America. But now Bush seems to be following in that same sorry tradition.
While most of the media focused, with good reason, on the huge increase in military spending and dramatic cuts in domestic programs in President Bush's $2.1 trillion budget proposal for 2003, a fe
An awakened sense of outrage has reporters and members of Congress playing a fierce game of hounds and hares with Enron executives and other bandits, which is most fortunate for Alan Greenspan. If the Federal Reserve were not treated with such deferential sanctimony, its chairman would also face browbeating questions concerning his role in unhinging the lately departed prosperity. Newly available evidence supports an accusation of gross duplicity and monumental error in the ways that Greenspan first permitted the stock market's illusions to develop into an out-of-control price bubble and then clumsily covered his mistake by whacking the entire economy. These offenses are not as sexy as criminal fraud but had more devastating consequences for the country.
The supporting evidence is found in newly released transcripts of the private policy deliberations of the Federal Open Market Committee (FOMC) back in 1996--the fateful season when the froth of asset-price inflation was already visible in the stock market. In a series of exchanges, one Fed governor, Lawrence Lindsey (now the President's chief economic adviser), described with prescient accuracy a dangerous condition that was developing and urged Greenspan to act. Greenspan agreed with his diagnosis, but demurred. If Greenspan had acted on Lindsey's observations, the last half of the nineties might have been different--a less giddy explosion of stock market prices without the horrendous financial losses and economic dislocations that are still unwinding.
Lindsey described back in 1996 a "gambler's curse" of excessive optimism that was already displacing rational valuations on Wall Street. The investment boom in high-tech companies and the rising stock prices were feeding off each other's inflated expectations, he explained, and investors embraced the improbable notion that earnings growth of 11.5 percent per year would continue indefinitely. "Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation," Lindsey said. Boy, was he right. The Federal Reserve has the power to cool off such a price inflation by imposing higher margin requirements on stock investors, who borrow from their brokers to buy more shares. That is what Lindsey recommended.
"As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst the bubble becomes overwhelming," he told his Fed colleagues. Acting pre-emptively is crucial; if the regulators wait too long, any remedial measure may be destabilizing. "I think it is far better to do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights," Lindsey warned.
Greenspan lacked the nerve (or the wisdom) to follow this advice. The chairman did make a celebrated speech in December 1996 observing the danger of "irrational exuberance" in the stock market, but he did nothing to interfere with it. In the privacy of the FOMC, the chairman agreed with Lindsey's diagnosis. "I recognize that there is a stock-market bubble problem at this point [the fall of 1996], and I agree with Governor Lindsey that this is a problem we should keep an eye on," Greenspan said. Raising the margin requirements on stock market lending would correct it, he agreed, but he worried about the impact on financial markets. "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it," Greenspan said. "My concern is that I am not sure what else it will do."
In hindsight it's clear the Federal Reserve chairman got it wrong. But his private remarks in 1996 also reveal flagrant duplicity. As the market bubble grew more extreme and many called for action by the Fed, Greenspan repeatedly dismissed criticism by explaining that raising the margin requirements would have no effect. In testimony before the Senate Banking Committee in January 2000, Greenspan said that "the reason over the years that we have been reluctant to use the margin authorities which we currently have is that all of the studies have suggested that the level of stock prices have nothing to do with margin requirements."
By 1999 the stock market was in the full flush of the gambler's curse--remember Dow 36,000?--and at that point Greenspan finally did act. But instead of tightening credit for stock investors, Greenspan proceeded to tighten credit for the entire economy, steadily raising interest rates in 1999 and 2000 until the long-running expansion expired. So did the stock market bubble (although stock prices remain very high by historical standards). Greenspan has always denied that this action was designed to target the bubble, but Bob Woodward, who wrote an admiring account of Greenspan's years at the Fed, reported that the "Maestro" was stealthily deflating the bubble by slowing the economy. Greenspan got that wrong too, since a recession resulted.
Millions of Americans are now paying the price, either as hapless investors or unemployed workers. The democratic scandal is that public officials are supposed to be held accountable for their actions, including human error. Accountability is impossible when the Fed chairman is allowed to make policy decisions in closed meetings and keep his true opinions secret for five years. The FOMC's verbatim meeting minutes should be shared with the citizens who will be affected and made available for timely political debate. When reformers get finished with the funny-money accounting at Enron, they might turn their attention to some holy illusions surrounding the Federal Reserve.
A report from Porto Alegre on the "antiglobalization" movement.