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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.
POSTED BY: Bob P. (March 24, 2008 10:58 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 (March 24, 2008 11:45 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 (April 03, 2008 07:16 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...
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