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American International Greed

March 21, 2009 in Politics

In the old movie Wall Street we were told that greed is good, although it is one of the seven deadly sins. Actually the foremost in my mind, since all the other ones are really just greed for something specific (food, sex, leisure, etc.). And now this whole AIG debacle has made the letters stand for Arrogance Incompetence Greed. Just the kind of image you would want your company to have. Anyway, I think all the outrage is an outrage. It is not as if this comes as any surprise. I mean that the corporate high fliers help themselves to amazing riches, on the dime of the general public. If it’s not tax payers’ money it’s the pension funds for you and me that buy the stocks that keep theses fat cats fat. In the case of the AIG financial people that just got their money, I can understand the underlying reason for wanting to pay them the award. You know that you’re in for a tough time and you need to decouple certain things as fast as possible, and to make sure that it’s timely you tell the people that knows the mess from the inside that if you stay with the company and help us wind this down we’ll pay you a little bit extra at the end. So far I fully agree. And I think that maybe two or three months salary would be a reasonable amount. After all, they are getting paid in the mean time anyway. But the amounts that they got paid.

Sheesh! If $6.2 million is equivalent to a year’s salary, that person should have been fired on the spot for getting AIG into the situation they were. And what does congress do? They do what they should have done long ago. They make sure that there is a law that caps the payments for companies getting bailed out by public funds. After all, the alternative is bankruptcy, which would pay most people very little, if anything. But the irony of the House of Congress bill is that that most of the AIG Finance people are located in London, UK, and as far as I know they are not affected by US tax law. So they still get their money untouched. All this while AIG is suing the IRS to get some tax money back. They are suing their majority owner. That’s some cojones.

So how much money are we talking about?

I started to ponder how much money we’re talking about, so I made a thought experiment. I took $6,400,000 and paid 35% income tax on that. That left me with $4,160,000, which I put into one of those GMAC CDs they are advertising on television. The guarateed one year interest rate is 2.85%, so better than a general savings account, but probably not the best investment you can make. Anyway, after a year I would have $118,560 in interest. That is a reasonable salary in itself. Especially when you take into account that in 2007 the US median salary was $31,400 and the average was $40,700. So we’re talking 4 times the median and 3 times the average US salary. OK, New York region is actually about 25% higher with $39,100 as the median and $50,800 as the average (http://www.bls.gov/oes/current/oes_nat.htm). Now I hear some people grumbling that these are experts in their field and they deserve more. OK, so let’s say they are Financial Managers (which for all practical purposes should be the people they are reporting to). Then the picture looks like this. US median $95,300, US average$106,200. In the New York area these people are paid about 35% more than the national average, so that statistic is median $132,300 and average $141,900. So now the interest is slighly less than the salary of their average boss, but still more than Airline Pilots who nationally earn $113,900 on average. In New York there must be mainly part time pilots, because they only earn 61% of that. Even the $4,000,000 bonus recipients would get the tidy sum of $74,100 in interest. Still more than the New York average and considering that capital gains is taxed lower than work it is actually worth more.

So how about the CEOs?

Another good question. They are not immune to this ballooning pay schedule. Average salary for Chief Executives nation wide is $151,400 and in the New York region it’s 25% higher at $189,300. Note that the difference for Chief Execs in percent is the same as for all workers. Finance managers earn relatively more in the Big Apple. Now we come to how much some of the bailed out CEOs were getting. I have taken the 2007 amounts from http://www.aflcio.org/corporatewatch/paywatch/ceou/database.cfm and I have used the lower of their two measures to make sure that I don’t fan the flames. At least not more than necessary. I have also thrown in a few other CEOs to get more perspective. Here we go:

Lloyd C. Blankfein, Goldman Sachs $53,966,198.00
E. Stanley O’Neil, Merrill Lynch $24,306,586.00
Kenneth D. Lewis, Bank of America $23,646,455.00
Richard S. Fuld, Lehman Brothers $22,052,273.00
G Kennedy Thompson, Wachovia $21,198,510.00
Charles O. Prince, Citigroup $15,105,376.00
Richard F. Syron, Freddie Mac $14,497,981.00
G. Richard Wagoner, GM $14,415,914.00
Jeffrey R. Immelt, General Electric $14,287,557.00
Martin J. Sullivan, AIG $13,960,382.00
Daniel H. Mudd, Fannie Mae $11,648,409.00
John T. Chambers, Cisco $11,159,897.00
Kerry K. Killinger, Washington Mutual $5,250,770.00
Stephen E. Ballmer, Microsoft $1,350,834.00
Warren E. Buffet, Berkshire Hathaway $175,000.00

So, judging by this Lloyd Blankfein is at least 40 times as good a CEO as Steve Ballmer, or even five times better than John Chambers. I will not even mention Warren Buffet.

Well, this was 2007, and in 2008 a lot of things happened and some of these CEOs lost their jobs.  Like Stan O’Neill of Merrill Lynch. He lost his job and reportedly (wikipedia) got a severance packet valued at the time of about $161,500,000.  If he paid 35% tax and put it in a GMAC CD at today’s interest rate that would bring him almost $3,000,000. And that would be able to continue.

Every.

Single.

Year.

Some of the other CEOs that had to leave their post were Martin Sullivan of AIG, who got a much smaller severance. His was only worth $25,400,000 or $47,000,000 depending on sources. But even the lower amount would bring in $470,000 per year in my investment scheme. Charles Prince of Citigroup reportedly got $38,000,000, which would give a GMAC return of about $700,000. Ken Thompson of Wachovia had to settle for the measly sum of $8,700,000, which if reinvested my way would give about $160,000 per annum.

Some of them were of course less fortunate. Kerry Killinger of WaMu didn’t get anything when FDIC stepped in , and Richard Syron of Freddie Mac and Dan Mudd of Fannie Mae also had their severance packets taken away. Didn’t they have contracts? :-O

To me these numbers are all obscene. Are these people really contributing that much to society? Are they really worth it? Just to reiterate.

Of all the workers in the USA, the median income is $31,400, and the average income is $40,700. And for those who are not sure what the median is. It’s the middle value, meaning that there are as many people who earn more than $31,400 as there are people earning less than $31,400. And I’m pretty sure that that latter half don’t have as good health care coverage as the other half either.

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