The Revolting Change to the Revolving Door
Crony Capitalism Thrives
While the European Union has moved to cap bonuses for bankers, a whole new beast is coming to light on our side of the Atlantic.
Note: This has nothing to do with the continued existence of banker bonuses in the United States.
While the payouts aren't massive compared to the astronomical bonuses accrued in the lead-up to the Great Recession, bankers successfully shrugged off any meaningful attempt to change the status quo. Arguments for bonuses inevitably focused on a “loss of competitiveness” and inability to attract and retain the most talented and skilled traders and bankers.
The bonuses are obscene: 142% of U.S. median household income last year, to be exact. However, on some level it does makes sense that big banks feel a need to “keep up with the Joneses” in order to retain their star traders and skilled employees. After all, bonuses are a reward for making the business money.
This is sink-or-swim capitalism, folks. You don't get paid unless you deliver results and keep money pouring into accounts.
And that's why we should all be fearful of the new style of bonus that has popped up.
Citigroup clearly sees a reason to hand over millions of dollars for results. But the recipient of this new type of compensation isn't actually doing any work to make Citi money (at least on the surface); instead, he's being paid to leave for a government office.
The Implicit Bonus of the Revolving Door
By now, I assume all of us are (painfully) aware of how ingrained cronyism has become between “too big to fail” banks and our Federal Government.
Take the Treasury Department alone: The ties run deep among the “too big to fail” banks, industry-funded think tanks, and the government that depends on both for “unbiased” guidance...
You'd have to go all the way back to the Reagan years with James Baker to find someone who didn't take advantage of moves in and out of businesses between holding an office. Since Baker was in office, things have only gotten worse in this regard.
Look at how cozy the Fed's relationships with organizations and businesses that exclusively serve the interests of the rich and powerful in maintaining the status quo have become in the 21st century...
Timothy Geithner had his start with Kissinger Associates, founded by Henry Kissinger and Brent Scowcroft (who need no introductions), to advise business clients on government relations. In 2002 he joined the Council on Foreign Relations, the target of much speculation as it collects large donations from businesses while pumping out reports that are heavily cited by government officials. He became the president of the Federal Reserve Bank of New York, Vice Chairman of the FOMC, a member of the exclusive “Group of Thirty” shortly after... and in 2008 Geithner replaced Henry Paulson as the Treasury Secretary.
Now he's heading right back to the Council on Foreign Relations to continue to shape government policy without outside oversight. Geithner joins another ex-Treasury secretary, Robert Rubin, in the Council on Foreign Relations. (Rubin went from Goldman Sachs to the Treasury Department — and on his departure from Washington, he skipped right over to Citigroup.)
Henry Paulson worked for the Department of Defense and directly with Nixon's domestic affairs advisor. Following his post, he went to work for Goldman Sachs, where he climbed the ranks to a CEO and built a $700 million fortune... When he took over the Treasury Department, he was in the position to bail out the banks. How convenient.
John W. Snow started as a lawyer, worked for the government for transportation-related offices, left office to eventually head the CSX railroad, and joined the highly influential American Enterprise Institute and other NGOs... His short tenure as Treasury Secretary was filled with tax controversy and a conflict of interests with investment issues... but his bumpy ride didn't affect his return to the private sector, where he was immediately scooped up by Cerberus Capital Management with $20 billion in total assets.
We could keep going, but there is nothing new going on here...
The revolving door and the perks of moving through it as much as possible are becoming increasingly large and evident.
The New and Explicit Bonus of the Revolving Door
That brings us back to where we started: The dangerous new twist to bank bonuses, a harbinger of change for the worse.
Jack Lew, President Obama's favored advisor, is moving into the Treasury Department. Not only has he been a huge beneficiary of the revolving door so far, but now he is being paid for leaving Citigroup.
The bonus is part of a clause in his contract with Citigroup that explicitly states he will keep his bonus by leaving early — but only if he does it for a high-level government position.
During the Senate confirmation hearing in early February, the clause was briefly brought up by Sen. Orrin Hatch of Utah. When asked, Lew stated, “I'm not familiar with records that were kept, so I don't have access to things that I don't know about.”
Orrin dropped the line of questioning as soon as it started, but he really should have called Lew out: There's no way Lew is unaware of the fact that he's about to be make a boatload of cash. Lew joined Citigroup's global wealth management division in 2006 as chief operating officer after being handpicked for the spot by former Treasury Secretary Robert Rubin, Chairman of Citigroup's executive committee.
The employment agreement states Lew's “guaranteed incentive and retention award” wouldn’t be paid if he quit his job — with one exception: If he left Citigroup “as a result of [his] acceptance of a full-time high level position with the United States government or regulatory body... prior to the payment of any incentive and retention award for performance year 2008 or thereafter.”
This huge deviation from a standard performance and retention bonus included all of his stock and equity awards. If and when Lew left for high-level government work, all of his restricted stocks would immediately become vested... Citigroup is going to give Lew between $250,001 to $500,000 worth of accelerated restricted Citigroup stock and $1.1 million of “salary and discretionary cash comp” as of January 2009.
That's a hefty bonus, alright... but exactly what performance is it rewarding — and what is Citigroup retaining here?
In his new post, Lew will be overseeing the entire financial industry, potentially orchestrating any future bailouts, and have a massive influence over any reserve or equity rules that could reduce risk and protect Americans from “too big to fail” fallout damage.
Of course, protecting Americans from that fallout would curb the ability of big banks, including Citigroup, to use debt and equity to fuel record profits.
Lew may not technically be able to build value and drive profits for Citigroup, but it is clear the bank thinks it's worth it to their business to give him at least $1.5 million for leaving the company for this position.
Take your pick for the words you'd like to use to describe that payment, but it seems to me that 'incentive,' 'retention,' and 'performance' all belong in there — along with 'bribe,' 'payout,' and 'protection money,' which clarify Citigroup's reasoning.
Jonathan Weil of Bloomberg asked a Citigroup spokeswoman about it, who promptly replied that “We have no such incentives, then or now.” Mr. Weil did some digging and found it in their own documents. Here it is in all its glory.
Lew's White House budget chief replacement is already poised to be the next beneficiary of the revolving door — and Robert Rubin's patronage, too. Sylvia Matthews is president of the Wal-Mart Foundation after serving in a variety of economic policy roles in the Clinton administration, including as a top aide to Mr. Rubin.
Serving (A Select Few) Taxpayers
The Treasury Department describes its mission as such:
To maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively.
How could this bonus system possibly exist when Jack Lew's mission as the head of the Treasury Department is to protect the integrity of the financial system? How could he possibly justify collecting a payout from Citigroup when he should be acting in the interest of the broader economy and of the taxpayer?
The answers are simple: He won't and he can't.
We've been cut out of the equation thanks to the revolving door.
We saw it from the Treasury Department when they bailed out banks and left small businesses and homeowners on their own... We've been seeing it as the banks have gone on to use that bailout money for anything but lending to the small businesses that are the lifeblood of our country... And we're seeing it as the Federal Reserve has built a $3 trillion balance sheet to maintain easy money for “too big to bail banks” that will only cause crippling inflationary pressure in the future as our wages continue to stagnate and shrink.
Who will be on the hook when interest rates rise and the Fed starts owing money to maintain and unwind its purchases?
Certainly not the banks that have gorged on the benefits...
It'll be the taxpayers who take up the burden.
Not only are we taxpayers on our own; we also have to clean up after the unsustainable profiteering our government officials set up for the corrupt financial institutions that are handing them money to game the system.
As far as I'm concerned, this is the official tipping point: This bonus marks the moment when government officials and big banks dropped the flimsy facade between them.
We can't afford to beat them, and we're all stuck on the outside on our own.
Brace yourself; it'll only get worse from here on out...
Adam English for The Outsider Club