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Archive for October, 2011

The Occupy Wall Street Protests have had few unifying themes and focused demands. But the call for “social (read economic) justice” from “the 99%” poses the question: “if we are without jobs, why are the fat cats on Wall Street making so much money?” So let’s examine just why the top 1% makes so much more than the average American. Is their income justified? Is it luck, or a rip off of the system?

Let’s start with examining entry level jobs in investment finance. The average starting salary for those new college graduates lucky enough to find full time employment is about $51,000. A first year analyst at a major Wall Street firm can expect a pay package including a bonus of something around $90,000. This would seem to be a substantial sum, but because baby bankers work upwards of 90 hours per week, their hourly pay is roughly equivalent to other private sector jobs. And in order to land those jobs, those kids need to have come from a top ranked school, performed exceedingly well academically, and be preternaturally articulate.

Pay for those Wall Street jobs goes up fairly rapidly, and in about five years, those who survive the grinding schedules and perform well can progress to pay packages that might be in excess of $350,000. Of course, for these types of financial rewards, the competition is fierce, and it is a very steep up or out pyramid. Nonetheless, such a pay package would be enough to land a late twenty-something into the top 1% of income earners. For 2009, the IRS indicates that belonging to this group required adjusted gross income of about $344,000. By the time that these bankers have spent 10-15 years in the business and have become experts in their fields, they can make upwards of $10 million dollars per year. In the perception of some of the OWS protesters, many of the people who work on Wall Street are “fat cats”. Yet even in the firms themselves, it is only the superstars who can achieve this exalted level. Goldman Sachs, the most storied of these investment banks, employs over 35,000 yet only 375 or so are partners. And having achieved these rarefied heights, turnover is high. About 100 new partners are named in each two year cycle. To make room for them while keeping the partnership ranks relatively constant, some who have reached this level are “de-partnered”, while the balance are encouraged to “retire” from the firm.

So are these superstars really worth what they are paid? In the hilarious 1983 movie “Trading Places”, two greedy old fat cats force a young investment executive played by Dan Ackroyd to trade places with Eddie Murphy’s street hustler as a bet to test whether luck and circumstance on the one hand or skill on the other is the determining factor for success. Played for laughs, the answer seems to be a mix of both.

Some have suggested that banker’s pay is somewhat analogous to Pascal’s Wager. The bank might overpay in any given year for the talents of an individual who may bring it substantial gains, but the costs of doing so are relatively modest compared to the potential reward. And doing so deprives its competitors from access to this trained and (perhaps) performing individual.

Sports fans generally do not have a problem when they hear of the multimillion dollar pay packages awarded to athletic superstars. They tend to understand that sports careers at the elite level are very limited in duration. Most of the players come from modest backgrounds, and their performance is both easily measured and demonstrably better than almost anyone else. But when the public hears of enormous Wall Street pay packages for executives in the face of massive failure and federal bailouts, they become enraged. Bob Rubin at Citigroup, Stan O’Neal at Merrill Lynch, Jim Cayne at Bear Stearns and Dick Fuld at Lehman Brothers would be poster boys here. Yet even as those outrageous outcomes occurred, can anyone with any real knowledge of economics fail to grasp that if the TARP bailout was not implemented and all of these banks were allowed to fail, the resulting depression would have crushed the economic life of most of the 99%?

Major wealth which accrues to business entrepreneurs also seems to evince far less envy and disgust. We recognize that most businesses are small and their health is precarious. Business owners generally risk their own capital, and can lose it all if the business fails. Moreover, it is these new enterprises that have created over 65% of new private sector jobs in the last 17 years. It is part of the American dream to be able to succeed grandly, and many would not see that opportunity, no matter how unlikely, taken away. We lionize billionaire entrepreneurial iconoclasts like Steve Jobs, even as we revile the “greedy” investment bankers.

Perhaps part of the general public’s poor perception of Wall Street is a lack of understanding of the role bankers play in facilitating the formation, growth and everyday functioning of every other business. That they have been able over time to command such fees for their services reflects the reality that at the top, bankers are for the most part elite intellects with important and desirable skills. Derivatives trading may be blamed for the demise of the banks, but the reality is that the majority of the notional amount of such trading is for foreign exchange, without which international trade would be prohibitively more expensive, and all manner of goods and services, from fresh fruits to electronics might be beyond the reach of “ordinary” Americans.

So what do you think? Is it unacceptable in our society for some to make so much while others get so little? Or is this the price we as a society must pay for the freedom for all to have a chance to succeed, or fail? Are the bankers guilty or was the bailout caused equally, or even more so, by the failure of government regulators to dictate appropriate capital requirements, the lack of which allowed the banks to embrace higher than historical risk?

 

 

In the aftermath of the 9/11 attacks, news outlets such as CNN began to regularly use “active crawl” or “news tickers”. Though they had been sporadically employed for several years to impart news of school closings, stock prices and late breaking news, they soon became a regular fixture on these and other programs. ESPN started using the crawl a couple of times per hour.

This year, Tennis Channel began using a crawler nonstop during all tournament coverage. Regular viewers of their programming must be asking the question “why do they do it?” The crawler displays extraneous information about the world of sports, this day in the history of tennis, and most annoyingly, other tournament results including from the one they are broadcasting. Some of the programming is live, and some rebroadcast because the tournaments are held all over the world, and actual match times may be in the middle of the night in the US. So it is not unusual to see the results of the next match to be shown before the match is broadcast.

To add insult to injury, the ever present crawler cuts off the view of the bottom of the screen that most true students of the game would like to see. To appreciate the genius of the players, you need to look at their footwork and the little steps they take to put themselves into position to hit the amazing shots that entice us to tune in.


The producers/directors of the broadcasts must not be players, because this view is routinely denied. Either that or, perhaps they are just bored with their own shows because they have ADD.

Today I had planned to go down to Zuccotti Park in downtown New York to meet and talk with some of the participants in the Occupy Wall Street protest. Imagine my surprise when I heard them marching up the East Side towards the home of Jamie Dimon, the CEO of J.P. Morgan Chase. I grabbed my sunglasses and hurried to join them.

A couple of hundred protestors were clogging the sidewalks, chanting “We are the 99%; no more tax cuts for millionaires!” It looked as if there were an equal number of police to restrict their movements to the sidewalks, and another nearly equal number of photographers and reporters scurrying along the edges of the street to cover every bit of the action.

I wandered into the crowd and announced to a young man that I was part of the 1% and I was there to listen to what they wanted to say. He replied that they “just wanted to be heard”. So I replied that that was why I was there. I told him that I had been a Main Street guy, not a Wall Street banker, and that I had helped to create hundreds of jobs in the course of my business career. What was it that they wanted to accomplish? He said he wanted to have all the fat cats (OK, I am a little heavier than I want to be, but I don’t think I am a fat cat; more like a rounding bear) pay their share of taxes. So I asked him, and several of the others standing around us, what percentage of taxes the top 1% of income earners ought to pay? Well, he stammered, and I could see he hadn’t really considered this before. Then he just walked away. One of the others said “like 80% of all taxes”, to which some of the others said that was just silly. So I asked them what they thought the top 1% actually did pay? After guessing 5-20%, most were shocked to find out that the answer was 38%. I repeated the attempts to engage, but several more of the protestors just walked away from me. Then I began a conversation with a reporter covering the protest, and our photo was apparently taken at that point (see below)

The New York Times’ Robert Harris in action! UES resident complaining about how “these kids won’t listen [to me].”http://yfrog.com/ocgvwzjNelson at OWS protest


I know this because about an hour later, one of my daughters who had been looking at various feeds of the protests was flabbergasted to see me caught up in the action and informed me.

On balance, I have to say that is was a thoroughly invigorating exercise to try and have dialogues with the protestors. Many of them were union members not at all open to conversation with me, but most were young people having their first go at mass social protest. In my day, we had the anti Vietnam War protests which had a clear objective. They were not only fun; we thought we were making a difference. And I saw that same spirit in those kids today. They may not know yet what they want to result from these protests. But they are upset with the way things are going. They don’t believe that politicians from either party have the right solutions, and they want to be involved in the process of change. And that’s just great! As my other daughter told me, it took the founding fathers four months to come up with the Constitution which has served us so well for so long, and the OWS protestors have only been at it for 3 weeks.

 

 

Just when you think you know who someone is, you get a surprise. President Obama had reportedly decided to stay true to his leftist leanings, and not move to the center in order to be reelected. He talked about re-energizing his base of support. But in the past week the following four actions have been taken.

    • US Forces using Predator drones killed U.S. citizen and al Qaeda terrorist leader Anwar al-Awlaki in Yemen, earning the praise of former VP Dick Cheney.
    • The Obama administration on Monday affirmed a controversial offshore oil lease sale, a key step in the process to allow drilling in the Arctic waters off Alaska.
    • The White House has been testing the idea of supporting a flat tax, saying that even millionaires and billionaires should pay the same rate as their secretaries.
    • Free Trade Agreements with Panama, Colombia and South Korea that have been held up for years have been sent to Congress for ratification.

These are stunning changes. The next logical step would be approval of the Keystone XL pipeline project. This would result in about 20,000 new high wage U.S. manufacturing jobs and about $20 billion in economic benefits. Despite prior environmental objections, in August, the EPA stated that the project poses “no significant impacts”, and it also has the benefit of reducing reliance on, and payments to, unstable middle eastern governments. In order to proceed, all that is lacking is a Presidential permit from the administration.