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The Hog Wallow

by Alexander Cockburn

When did the great executive stock option hog wallow really start? You can go back to the deregulatory push under Carter in the late Seventies, then move into the Reagan Eighties when corporate purchases of shares really took off. This was the era of the leveraged buy-out and merger-mania, assisted by tax laws that favored capital gains over stockholder dividends, and allowed corporations to write off interest payments entirely.

Between 1983 and l990 72.5 per cent of all US net equity purchases were bought by non-financial 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 non-financial companies sank themselves in debt by either repurchasing their own shares or acquiring shares as a result of mergers. 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 numbers 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 (also from Verso) on the past and future of pensions, Banking on Death.

Why did these chief executive officers, and chief financial officers, and boards of directors chose 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 corporations are allowed to deduct these same costs from company income.

As Brenner remarks, US law “thus encourages corporations to exaggerate their earnings in public for the benefit of their stockholders, while deflating them in private for the benefit of the Internal Revenue Service.”

It’s fun these days to read all the jubilant punditeers who favor 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 Jonson’s 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. Brenner cites a Bear, Stearns study reviewing all S&P 500 companies in 1999 that calculated their net income in that year would have been 6 per cent lower had stock options been counted as an expense. Earnings at Yahoo, Broadcom, JDS Uniphase and the others would either have been wiped out or gone deeply negative.

By the end of 1999 average annual pay of CEOs at 362 of America’s largest corporations had swollen to $12.4 million, more than six times what it was in 1990. The top option pay-out 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 Nineties 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 America’s 362 largest companies rise to a level 475 times larger than that of the average manufacturing worker.

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 non-financial corporations between 1994 and 1999, inclusive. Of that sum, corporations used just 15.3 per cent for capital expenditures. They used 57 per cent of it, $697.4 billion, to buy back stock and thus enrich themselves. Surely the wildest smash and grab in the history of corporate thievery.

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 of 2001, it took a 15-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. Michael Bonsignore, ousted as boss of Honeywell, got a $9 million settlement, plus a commitment that he continue to be treated as a chief executive, with “executive transportation” and “financial and tax-planning services” for the rest of his life.

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). Prime yourself for a bout of rhetorical populism, necessary to soothe popular indignation.

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. One great battleground of the next decades across much of the world will revolve around pensions and issues of asset-based welfare for the swelling ranks of older folk. Here in the US privatization of Social Security has been only staved off because Bill Clinton couldn’t keep his hand from his zipper and again because George Bush’s credentials as a voucher for the ethics of private enterprise have taken a fierce beating.

But the wolves will be back, and pop-gun 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 can protect the Bill of Rights. (In the most recent snoop bill pushed through the House, only three voted against a measure which allows life sentences for “malicious computer hacking”: Dennis Kucinich, and two Republicans, Jeff Miller of Florida and the great Texas libertarian, Ron Paul.)

It was the Democrats in the US senate in early July who rallied in defense of the accounting “principles” that permit the present deceptive treatment of stock options. Not just Joe Lieberman, the whore of Connecticut, but Tom Daschle of the Northern plains.

Pop-gun populism is not enough. Socialize accumulation! Details soon.


Alexander Cockburn’s Guillotined! and A Colossal Wreck are available from CounterPunch.

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