Markets
My Take on Greed
Greed may throw the entire country into an economic recession. But greed has its upside too.
By Fred W. Frailey, Editor
From Kiplinger's Personal Finance magazine, April 2008
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Lately, I've been thinking about greed. In our capitalist system, it does a lot of good by prodding us to become successful financially. But it can also do a lot of harm. People break laws under the influence of greed -- or they do only what's best for themselves, at the expense of everyone else.
Want some examples? Out of greed, mortgage bankers made home loans to people with poor credit histories, then immediately sold the loans. Now when borrowers default, it's somebody else's problem.
Out of greed, Wall Street's investment bankers packaged the same loans in ways that earned the securities undeserved investment-grade ratings, then sold them to eager clients. As those securities are now downgraded to junk, they become pretty close to worthless.
Four of the five biggest firms on the Street -- Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley -- recently took losses in the tens of billions of dollars for subprime skeletons in their own closets.
Rewarding failure
So what did greed accomplish? It destroyed the share prices of the investment banks, punishing those of you who invested in them. It cost thousands of employees their jobs as the firms downsized. It may throw the entire country into an economic recession, by causing the financial machinery to seize up.
And yet, the four investment banks, plus Goldman Sachs (which didn't underwrite securities that contained subprime-mortgage loans), handed out year-end bonuses in 2007 totaling $39 billion -- that's right, billion. That's more than three times the combined profits of all five firms last year.
Bloomberg News, which recently revealed these interesting facts, quotes an executive recruiter: "It's critical that pay is still there or you're going to lose really good people." Let me get this straight: In reckless pursuit of underwriting profits, the executives and talented people at four firms almost brought down their companies and the U.S. economy -- and their reward is an even bigger bonus pool so they won't jump ship?
Still, I think greed can be good. Bill Gross has spent his adult life building Pimco, in Newport Beach, Cal., into a bond-trading megabusiness. As its co-founder and managing partner, he has amassed a net worth of $1.3 billion, according to Forbes magazine. And now he and his wife, Sue, are happily giving it away through their family foundation.
Hoag Hospital, in Newport Beach, recently got $20 million to build a women's pavilion. The couple gave the University of California at Irvine $10 million for stem-cell research. Most interesting of all, Gross, a collector of classic stamps from around the world, auctioned off his entire collection of rare British stamps for $9.1 million, which he then donated to Doctors Without Borders.
When it hurts
As my colleague Manny Schiffres and I finished an interview with Gross (see The Big Picture Isn't Pretty), I asked Gross about his philanthropy and his face visibly brightened (I think he was tired of talking about bonds). He credits Sue with doing the couple's due diligence, and he says they've given away about a third of their fortune so far.
"When you're 80 years old and about to kick it, anybody can give away money. It's important to give away a piece when it really matters and when it really hurts," says Gross, who is 63. "I'd suggest people try that."
So good things as well as bad arise from the investment world's rush to make every last dollar. That's important to remember as we lurch through 2008.
Reader Comments (10)
Posted by: Joan S. at 03/20/2008 11:18:02 AM
I wish the board of directors of corporations would all read your article on greed at the expense of others. My husband is in sales and receives commission and bonuses on actual performance - meeting quota. Logically, it would seem that a CEO would receive bonuses based on corporate profits. We own stock and profits are down considerably and yet the CEO received a hefty bonus. It doesn't make sense...With individual stocks, a shareholder can at least vote, but with mutual funds we don't have a direct voice. When the average household has to do cost cutting measures to survive, we would like corporations and government to do likewise.
Posted by: Bob P. at 03/22/2008 02:23:02 PM
Mr. Frailey’s indictment of greed ("My Take on Greed", April 2008) is equivalent to blaming gravity for the injuries of people who fall off ladders. Greed, i.e., wanting ever more for oneself, is an innate predisposition of every living creature. Governments were created to constrain greed for the greater good while allowing it to continue to operate as the engine of social progress. The recent problems in the credit markets represent a clear failure of government’s regulatory responsibilities, not any excess of greed. And the greed of shareholders will ultimately rein in any excesses in executive compensation. As for Mr. Frailey’s trumpeting of the virtues of charitable giving, his example was equally unconvincing. He cites bond fund mogul Bill Pimco, who amassed a $1.3 billion fortune before deciding to donate one-third of his net worth. Mr. Pimco suggests that we be philanthropic “…when it really matters and when it really hurts”. Should we all then wait until we’re billionaires before getting generous? And does it “really hurt” to give away so much that you’ll have to get by on a mere $870 million?
Posted by: Doug at 03/24/2008 11:44:37 AM
..Bottom line is that greed is not bad. Who is to say what was a good decision versus a bad decision? I sure do not want to leave that up to the government. Houses prices were escalating, speculators within housing were increasing, home buyers wanted homes, financing companies had money.. it was a recipe for a correction. Just remember... everyone was taking risks and that includes lenders and borrowers...I wonder if property taxes will go down based on my home value decreasing...hmmm
Posted by: G Meyer at 03/24/2008 02:04:23 PM
I find it very interesting that many of those who have the most success in capitalistic endeavors (Buffett, Gates, Gross, just to name a few) turn into "charitable liberals" at the end of their careers. None of these men where given handouts (to my knowledge) and yet that's what they choose to do when they run out of things to buy that make them happy. I'm not a greedy person and I fully believe they can do with their money what they choose. Perhaps when you get to that age you're looking to "insure your legacy. At any rate. I could only wish to have a few hunderd million dollars to give away. Never mind that I had worked my whole life to build that up. God Bless America...a place where people can work hard, build a fortune and have to freedom to do anything they want with it.
Posted by: Ron R at 03/24/2008 02:16:26 PM
...I wonder how (Bob P.) would reply if his children were going hungry and his job had disappeared because one of those Greedy corporate executives decided that his job could be better done in some third-world country where the labor is one tenth of what he was making....(or)he was told that he would have to train some non-english-speaking foreigner how to do his job before he was dismissed! The governments job is to protect this country from outside evils...
Posted by: SteveTheInvestor at 03/24/2008 03:41:03 PM
Greed truly is rampant... everywhere. Executive compensation is out of control and has been for a long time. If an executive allows or encourages actions that are damaging to others, that executive should suffer the same fate rather than be rewarded for it...There are no consequences for executives any more and it's pathetic...And in regards to Bill Gross.... I applaud his generosity. I take exception to his "make it hurt" comment though. I don't think he "hurts" at all. When someone is that wealthy, they can donate huge sums and still have more money than they can reasonably spend. That does not describe the typical American by a long shot.
Posted by: Bob P. at 03/24/2008 10:58:48 PM
In response to Ron R's question about how I would respond if my children were going hungry after finding that my job was outsourced, I guess I could blame it on all those greedy Wal-Mart shoppers who are always searching for the lowest price, regardless how their decision hurts the poor workers whose jobs can be done much cheaper overseas. Now THAT'S real greed! But in truth, I would more likely blame myself for not ensuring that I possessed sufficient skills to protect my job from being outsourced by providing the best value to my employer that he could find anywhere in the world. I drove a taxi cab for a year after getting my engineering degree from UCLA. It was 1969 and the economy was slow...I did what I had to do to make a living. It's called being self-reliant and believing that I, not my government, am responsible for my job security. And regarding executive compensation, I do profess to know a bit about that. I was the VP of human resources for a telecom company. When shareholders (and the board) demanded that I find a highly competent CEO to head the company but the company is doing so poorly that no one with the intelligence to do the job would touch it with a stick, I had to offer a very sweet package to fill the job. It included forgivable loans, large bonuses and a golden parachute. Think that's too generous? Fine...but you wouldn't have found a capable candidate to fill that job. Fortunately, the CEO we hired caused the stock price to rise thirty fold in 18 months. A success story? Not quite. The company was in bankruptcy after another 18 months. You roll the dice, you takes your chances. Sometimes the most capable leaders get smacked in the head by circumstances (events that could easily have been avoided by all the Monday morning quarterbacks who immediately second-guess his/her qualifications and bemoan the severance expense). Executive compensation isn't rocket science...but it's clearly not well understood by most people (including Mr. Frailey). I have to laugh when I hear all the second-guessing of corporate boards on this subject.
Posted by: RoseJones at 03/24/2008 11:45:36 PM
Hah. The Executives of these major corporations all serve on each other's Boards of Directors, lining each others pockets with wealth that staggers the imagination, and are so far removed from what the average American must do to make a decent living that if they do have consciences, they don't even realize the effect of their greed-based actions. How would YOU like it if you spent 15 or 20 years giving your all to some (greedy) corporation, only to be demoted or laid off when some (even more greedy) private investment firm buys your company and strips it bare?
Posted by: AG at 04/03/2008 07:16:14 PM
If the executives don't deserve their pay packets then why do companies struggle to replace them? Corporations do not like to dole out such large chunks of cash unneccessarily. As the management level rises, the salary growth is exponential, all over the world. Primarily beacause there is a shrinking pool of qualified people competing. It is simply a question of supply and demand. The same reason why an ordinary non-specialist doctor fresh into practice will always command a higher salary than a world class engineer with decades of experience (unless he moves into management or become an entrepreneur). I fail to understand why people want to enjoy the benefits of capitalism but not live with its inherent negative aspects such as a tiny band of people getting incredibly rich...
Posted by: Jules at 01/18/2009 09:10:42 AM
but these guys AREN'T competent! They were just pretending. And we let them.