Let’s look at the presumed incoming Treasury Secretary, Jack Lew. He’s a die hard neoliberal, played a role in financial deregulation as Clinton economics team member, and a backer of NAFTA. But what is surprising is the limited interest in his personal dealings, which have been examined critically by Pam Martens and Bloomberg’s Jonathan Weil. Recall that Lew is essentially a career elite technocrat, with his major stint out of government being during the Bush Administration, when he first served as the Executive Vice President for Operations at NYU (where his noteworthy accomplishment was busting the bargaining rights of grad students) and then became the chief operating officer for Citigroup’s alternative investment group.
Weill zeroed in one provision of Lew’s employment agreement at Citigroup, that if Lew left for a “high level position with the United States government or regulatory body” his 2006 and 2007 guaranteed incentive and retention awards. The 2008 rider to the letter provided that if Lew left for the same type of “high level position” his restricted stock would vest immediately. Frankly, I think Weil is more riled up about this provision than he ought to be. The bank was giving particularly generous guarantees for joining. There was no reason to pay out on those guarantee if Lew broke his contract, unless he went to do something that would be of comparable value to the bank. You may not like the logic, but this is pretty cold commercial logic at work. Weil seems to have misread the “guaranteed incentive and retention awards” to mean Lew’s annual bonus on an ongoing basis. It didn’t. It’s a defined term that refers only to special goodies he got in 2006 and 2007.
What I find more disturbing is if you read the totality of Lew’s agreement versus Citi’s performance and Lew’s 2008 pay.
Remember, Lewis came from a job at NYU where he already looks to have been considerably overpaid. He received over $840,000 for the academic year 2002-2003, which had him earning more than most university presidents, including NYU’s president. And on top of that, as Pam Martens ferreted out, he was apparently given a $1.3 million house. I’m not making that up, go read her piece. The mechanism was that NYU lent the $1.3 million to buy the house to Lew and then forgave it over five years. Oh, and they paid him the money to pay the interest too. We will assume that the forgiveness of debt was reported properly to the IRS.
Now the house deal (which is rather bizarre given that NYU owns lots of nice faculty housing) might be what made Lew’s pay deal so out of line relative to his job. But if the forgiveness of debt was not included in the total, it’s even more insane, the equivalent of $1.1 million a year.
But Citi was still happy to pay over the market. If you read the Lew employment agreement, he got a $300,000 salary and a $1 million a year guaranteed incentive and retention award for each of 2006 and 2007. Oh, and he ALSO got a $700,000 signing bonus in restricted stock (or cash if the relevant committee did not approve the award!) that would vest 25% a year over the next four years. Oh, and the last goodies: he got his offer letter on June 26, 2006, and he joined in July. But his $1 million guaranteed incentive and retention award was NOT pro-rated for that year. And he got to take a $400,000 advance against it when he joined.
Now a general rule in headhunter land is you need to pay someone a 30% premium over their current job to get them to leave. But that is when they are recruiting someone with a good resume who is well situated away from a pretty secure position. You are paying them for assuming the risk of failure in a new job. There’s no evidence that Lew was aggressively courted to leave his job at NYU because a university administrator would be the perfect guy to play an executive role in a hedge fund business. The flip side, of course, is if a guy like Lew landed a plum government or regulatory job after Citi, pretty much any pay level would be a screaming bargain. And between Lew’s own history and then Citigroup vice chairman Bob Rubin’s deep network in the Democratic party, it would seem that the only risk was how long it took to get the Dems back in power.
But let’s look at what happened. Remember how Citi’s stock has cratered?
It is really hard to discern the scales, but Lew’s $700,000 award would have been made when Citi was trading (in post reverse split term) in the $480 to $500 a share range. When he joined the Obama administration as deputy secretary of state, the stock was in the $15 to $18 range. So it was pretty much worthless. Any restricted stock component of his 2007 bonus would also have lost most of its value.
Now, Lew’s salary was increased to $350,000 in 2008. Given that the bank was hemorrhaging losses and his unit was part of the problem, there’s no justification for a salary rise (remember, the wheels were staring to come off in 2007, as Citi’s stock price attests). Let us look at how Goldman, which was one of the stronger major players,* handled executive and staff pay in 2008. From Bloomberg:
Goldman Sachs Group Inc. eliminated 2,500 jobs in the fourth quarter and slashed average pay per worker 45 percent to $363,654 as the firm posted the first quarterly loss since going public almost a decade ago….
Goldman Sachs Chief Executive Officer Lloyd Blankfein and six deputies agreed to forgo their year-end bonuses after the firm converted to a bank-holding company and accepted $10 billion from the government to help it survive a financial crisis that eliminated three smaller rivals. The firm’s bonus pool, estimated at 60 percent of total compensation, dropped to $6.56 billion or an average $218,193 per employee this year.Yet Lew’s 2008 bonus of $944,000 was almost identical to his 2007 guarantee (note that we don’t know if he got any other goodies in cash, but again, given that the earnings of the bank fell 83% from prior year levels, that would be awfully unseemly). And let us not forget that this came out of taxpayer largess, not earnings.
Weill adds that Lew stood to receive another $250,001 to $500,000 in the cashout of restricted stock. Given the stock chart above, that has to have been almost entirely a 2008 award, any prior year awards would be worth chicken feed. And the bank knew as of November 15 (if not sooner) that Lew was going to the Administration, hence the award would be paid out in cash, out of taxpayer monies. In other words, that award should not be mistaken as a prior year grant, it’s almost all for 2008, and on top of that, probably understood at the time it was awarded to be effectively a cash award.
This isn’t hard to understand. When Lloyd Blankfein, who was excoriated by former Goldman co-chairman John Whitehead for Goldman’s role in leading “outrageous”n pay increases over Wall Street, is requiring significantly lower pay levels of his executives and troops for their 2008 pay. By contrast, a mere (albeit senior) administrator at a bank on government life support, got an effective increase. Yet as reported in the Washington Times, Lew had the temerity to tell Congress:
My position at Citi was a management position,” Mr. Lew replied. “I was not an investment adviser. My compensation was in line with other management executives at the firm and in similarly complex operations.”It may be true that the entire executive team was feeding at the trough as much as Lew. However, a look at the proxy shows that none of the top five executives at Citi took cash bonuses for 2008. So if top executives were taking major pay cuts, how could Lew, an administrator in a money-losing unit, claim to be treated just the same as everyone else?
But this simply means that Lew is a member of a protected class. The rules that apply to little people, including giving accurate, as opposed to strained-at-best, answers to Congressmen, just don’t apply to him. The idea that his pay package was basically a huge option payment by Citi on the pretty good odds that he’d land another big deal official post, doesn’t seem to occur to him. And why is that worth so much to Citi? Well, as we know, corruption in the US does not (often) take the form of briefcases full of cash being left in an office. It’s an ugly combination of intellectual capture, of mutual backscratching, and “don’t rock the boat,” of accepting norms of discourse, behavior, and action, that circumscribe the range of possible actions.
Lew no doubt believes he was paid according to merit, despite the blindingly obviously evidence to the contrary. And that sense of entitlement is what will enable him to kill old people without a second though. Because that is what winning cuts to Social Security and Medicare will do, given that Obama punted on his chance to tackle the health care cost problem.
I had predicted Lew would have us wanting Geithner back. At least Geithner would get twitchy when grilled. That means, somewhere inside, he actually knows right from wrong. Lew is such a bland technocrat that I wonder whether he has any compunctions.
But the lack of consternation about Lew’s financial record, and the way some respected members of what passes for the left (Robert Reich and Jamie Galbraith) have defended Lew, in part also shows how much things have changed in a mere four years. Obama’s lying has become so predictable that it’s hard to stir up any outrage over it.** And since fish rot from the head, one of Obama’s singular accomplishments is in defining deviancy down throughout the Beltway. For instance, Obama took the unheard-of step of collecting “unlimited corporate cash” in the words of Roll Call, with virtually nil in the way of disclosure, taking even stalwart supporters like the Grey Lady aback.
So Lew is indeed perfect for his new role, just not in the way ordinary Americans expect him to be.
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* I don’t buy Jamie Dimon’s claims re JP Morgan’s financial condition. Yes, the traditional bank was in vastly better shape than Citi or Bank of America. But JP Morgan runs a monster derivatives clearing operation which dwarfs the risk in the traditional bank. If AIG or Morgan Stanley had failed after Lehman, the blowback would most assuredly have taken JP Morgan down as well.
** Yes I know politicians lie, but Obama has completely redefined the boundaries of acceptable political fudging. It’s now all dishonesty, all the time.
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