The 91% Solution

The Quick & Simple Way to Fix Wall Street

[Editor's Note: in a post last week, "Financier, Heal Thyself? Don't Count On It," I promised a part 2. This is it. Heads up: if you read this blog purely for real estate content, or want a post with a little levity -- skip this one.]

Want to test your knowledge of political Americana?

Answer this puzzler:

Which U.S. Presidential candidate endorsed a 91% marginal tax rate on income?

A. George McGovern
B. Dennis Kucinich
C. FDR
D. Dwight Eisenhower

Answer: D.

In fact, the question is a bit of a curve ball: Eisenhower never campaigned on a platform of 91% marginal tax rates -- he didn't have to. That's because Eisenhower inherited a 91% marginal rate from the Truman administration -- and saw fit to leave it there during his eight years in office.

Dwight D. Eisenhower: West Point graduate. Supreme Allied Commander in World War II. President of Columbia University. Two-term Republican(!) U.S. President . . . wealth-redistributing, Commie radical!

Beaver Cleaver

If you don't remember the '50's -- and you won't unless you're at least 60 years old -- it wasn't exactly a Communist love-fest.

On the contrary, that era notably witnessed the Cold War, "duck-and-cover," and Joe McCarthy and his anti-Communist witch hunts ("are you now, or have you ever been . . .?").

Some other tidbits of '50's culture: Beaver Cleaver, "Father Knows Best," Bob Hope, Doris Day, and drive-in movies. (And to be sure, "colored-only" drinking fountains, restrooms, etc. in the South.)

Still, not exactly Haight-Ashbury in the '60's.

And yet.

And yet society and its lawmakers saw fit to levy a 91% marginal rate on annual income over $400,000 (equivalent to about $3 million today).

What were they thinking?!?

Values, Then & Now

A couple things, perhaps.

--That the country's social fabric was more important than the (very) well-being of its richest .05%.

--That the pursuit of ungodly sums of money was unhealthy -- even corrosive -- to one's self, and one's larger community.

--That the ability to make such ungodly sums of money was itself due to a peculiar historical confluence of built-up legal and political institutions; heretofore unimaginable gains in technology and productivity; and the sacrifices of many, many preceding generations.

Isaac Newton said that "if I have seen further, it's because I have stood on the shoulders of giants."

Today's CEO's are pygmies who think they are giants -- and that modern economic life began with them (obviously not true, but if we're not careful, it certainly may end with them).

It's hard to tell which trait best defines today's CEO's: hubris -- or greed.

Financial Reform, Circa 2010

Which brings us back to financial reform.

First, three stipulations:

One. The current financial system is so enormous and complicated, and has so many moving parts and interconnections, that few people understand half of it. Unfortunately, almost none of those people are elected officials in Washington.

Two. Even if FDR and his brain trust somehow sprang back to life with a divinely inspired blueprint for reform, they would be thwarted by today's political system. Too partisan, too balky, too corrupt.

Three. More limited, strategic reforms have either been ineffective -- or backfired spectacularly.

Case in point: legislation passed by Congress in 1993 to limit executive compensation -- considered excessive back then, even though it was a fraction of today's levels.

Barred from deducting executive salaries greater than $1 million, publicly traded corporations simply switched to awarding stock options and bonuses to CEO's.

More accurately, CEO's -- via their handpicked boards of directors -- started paying themselves in stock options and bonuses.

The 91% Solution, or, "I Like Ike"

Add the foregoing "stipulations" together and what do you get?

A broken, dysfunctional financial system that cannot be fixed.

Or can it?

To paraphrase Albert Einstein, the problem of Wall Street cannot be solved at the same level of thinking with which it was created.

So, go up a level.

What is Wall Street ultimately about, at least today?

Not service to one's fellow man ("God's work" -- the real kind); one's country (the definition of patriotism); or even just providing and efficiently allocating capital to the rest of the economy (Wall Street's putative purpose and raison d'être).

It's all about making money.

Obscene, unprecedented tidal waves of money.

To pick just one example, last year -- not a banner year for most, to put it mildly -- the top 25 hedge fund managers averaged $1 billion in compensation. That they paid 15% income tax on.

$30 Million a Year

Such a financial bonanza also suggests the solution: go back to Eisenhower-era marginal tax rates.

Hell, bump them up 10-fold, just to account for today's more expensive luxuries and toys (tycoons really couldn’t buy Lear Jets in 1955).

So, the John Paulson's and Lloyd Blankfein's of the world can make up to $30 million annually before coughing up the lion's share of it to Uncle Sam. Thirty million a year -- still not too shabby.

Such a remedy has the virtue of being simple, efficient, and laser-focused on the underlying problem plaguing today's financial system.

Oncologists now understand that the best way to kill an advanced or otherwise inoperable tumor (because of its proximity to vital organs) is to cut off its blood supply.

Raising marginal tax rates to 91% will have the same effect on the metastasizing cancer that modern-day Wall Street has become.

Proposal: Financial "Son of Sam" Law

Look Who's Cashing in on the Mortgage Mess

Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering. So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess. Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

--Eric Lipton, "Ex-Leaders of Countrywide Profit From Bad Loans"; The New York Times (3/3/09)

Let me see if I've got this right.

Bank executives at subprime lenders made hundreds of millions originating toxic loans that helped blow up the housing market. In turn, that helped blow up the banking system, which -- surprise! -- is now tanking the general economy.

Nothing has happened to them.

On the contrary, they are now using their toxic loan wealth and banking connections to make money a second time on toxic loans -- this time, by buying them for pennies on the dollar.

To paraphrase the government attorney who admonished Joseph McCarthy: "Have you no sense of decency sir(s), at long last? Have you left no sense of decency?"

And what kind of financial and legal system stands by and watches this happen??

Proposal: Financial "Son of Sam" Law

After serial killer David Berkowitz reportedly received lucrative offers to sell his story to publishers, New York state passed a law preventing such a travesty.

Known as the Son of Sam law, it authorizes the state to seize money earned from such a deal and use it to compensate the criminal's victims. The rationale, which hardly seems to require explanation, is that no one should financially profit from crimes that they've committed. Since then, 39 states have passed similar laws.

Such an approach seems tailor-made for today's housing and financial crisis, and the "economy killers" at the root of it.

The best thing for public confidence would be a healthy economy generating lots of well-paying jobs.

In the meantime, the next best thing would be sending the people most responsible for the financial crisis to prison -- or at least pulling them away from the trough ("A-I-G" is starting to look and smell a lot like P-I-G).

"Get it Back"

Preventing Depression --
Financial & Otherwise

[Editor's Note: Realtors are private citizens and taxpayers, too. You'd have to be living in cave not to be aware of -- and outraged by -- the conduct of Wall Street principals in the ongoing financial mess. The following post is a response to that behavior.]

Dismayed -- infuriated? disgusted? -- by the drumbeat of daily news documenting Wall Street excess, arrogance and entitlement? I am. I feel like the attorney confronting Joseph McCarthy in the famous 1950's hearings: "Have you no sense of decency, sir? At long last, have you left no sense of decency?"

Unfortunately, today the object of that revulsion isn't an individual but seemingly an entire industry, if not a culture.

With all the talk in the air of a 1930's-style financial Depression, there's no mention of another kind of depression: the psychological kind.

According to Psych 101, anger channeled inward becomes depression. Not holding Wall Street accountable for the myriad affronts to basic standards of decency risks a collective emotional Depression. (Interestingly, depression is linked with another mental state: learned helplessness.)

Forget about fear. Today, the biggest threat to our collective, extremely beleaguered "animal spirits" is bottled-up rage.

So here's my prescription: don't get mad, don't get even . . . get it back.

Keep reading:

I think there is an illness called Goldmansachs Head . . . When you have Goldmansachs Head, the party's never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he's feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn't know what time it is.

--Peggy Noonan, "Look at the Time"; The Wall Street Journal (1/30/2009)

Let’s insist with all our pent-up anger that those industries that are failing either be allowed to fail or be nationalized, and that their leaders be fired and brought to justice. For, in truth, their behavior has been criminal in its misuse of investor and government funds. The injury they have caused the country cannot be repaired quickly, but they can certainly be made to suffer where it matters most: why not confiscate every dollar they own, and their families own? This money is owed to us not under a Marxist-Leninist belief (although that is looking more appealing everyday) but because they actually, directly stole it.

--Paul Jenkins, "Shameful Bankers: Time for a Revolution"; PJPolitics Blog (1/29/2009)

"If you don’t pay your best people, you will destroy your franchise" and they’ll go elsewhere, [ex-Merrill CEO John Thain] said. Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism . . . How are these ruthless, careless ghouls who murdered the economy still walking around (not to mention that sociopathic sadist Bernie Madoff?) — and not as perps? Bring on the shackles. Let the show trials begin.

--Maureen Dowd, "Wall Street's Socialist Jet Set"; The New York Times (1/29/09)

Objections

"No legal grounds," you say?

It's been almost twenty years since I practiced corporate law, and yet I can come up with multiple causes of legal action without breaking a sweat (and lawful prosecution is everything -- otherwise, it's just a witch hunt and a mass venting of anger -- no matter how gratifying that they may be!).

For starters:

--Corporate waste (this means squandering assets one is charged to safe keep; I'd call this one a bulls' eye);
--Breach of fiduciary duty;
--Self-dealing (a specific type of breach of fiduciary duty);
--Filing false and misleading financial statements. Shareholders in many cases literally never saw what hit them because the really toxic, leveraged stuff was buried in off-balance sheet entities.
--Attesting to false and misleading financial statements (a separate offense under Sarbanes-Oxley)
--Insider trading. How many senior executives "pulled an Enron?" That is, they privately liquidated their company holdings while reassuring employees and shareholders that the market's fears were overblown. Or out-and-out exhorted them to buy. Let's use our subpoena power (below) to find out.

Undoubtedly, better and fresher legal minds can add considerably to this list.

"The money's already gone," you say?

Imagine telling your credit card company that you won't be mailing in your payment this month, and not to bother coming after you, because "you've already spent the money."

Even at $35,000 a toilet (what ex-Merrill Lynch CEO John Thain spent), you simply can't dissipate hundreds of millions (or billions) that fast. I have a strong suspicion that many of these former (and unbelievably, current) masters of the universe -- stock market reversals notwithstanding -- are far from judgment-proof (legalese for "broke").

Fortunately, our legal system has a variety of tools for recovering money from dry -- and not so dry -- wells. Liens. Garnishment. Security interests. Injunctions on spending. Forfeiture. Asset freezes. Rescinding fraudulent conveyances. Where there's a will, there's a way.

"Public Defenders," or, "Where's Elliot Spitzer
When You Need Him?"

So what can you or I, as private citizens, do to see that anyone who broke laws is prosecuted?

Short answer: we shouldn't have to. Even posing the question is a Red Herring.

As taxpayers, we collectively employ thousands of attorneys at the local, state, and federal levels of government -- and tens of thousands more support staff -- all sworn to enforce existing laws and protect our interests.

That includes 50 state attorneys general; hundreds of U.S. district attorneys; the U.S. Attorney General and Solicitor General, and hundreds more attorneys at the Securities and Exchange Commission.

Fortunately, our "public defenders" have a variety of legal tools at their disposal-- including broad subpoena powers -- to compel testimony and uncover the truth, find and recover ill-gotten assets, etc. Use them.

Yes, our legal system -- wisely -- has safeguards against compelling self-incriminating testimony (it's called the Fifth Amendment). That's why you don't have to submit to a breathalyzer test if you're charged with drunk driving. But if you don't, you automatically forfeit your driver's license and are taken into custody (at least in Minnesota). It's not hard to come up with analogous consequences for financial miscreants.

And yes, holding Wall Street accountable raises complicated, jurisdictional issues, questions of federal preemption, etc. But so what? Attorneys tackle and sort out such issues every day.

On the simplest, most fundamental level, what we have just collectively witnessed -- and continue to witness -- isn't complicated, it's quite simple. Namely, greed run amok.

Naming that behavior and holding the most egregious perpetrators accountable is the first step towards national healing -- financial and otherwise.