REYNOLDS: What to do about executive compensation

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By Alan Reynolds

Congressional hearings to barbecue Wall Street executives are as fun as a circus, but with more clowns. Presidential politics is now taking such political distractions to a lower level.

The announcer in Sen. Barack Obama's recent TV ad says, "Last week, another bank [Washington Mutual] went under. But its CEO could walk away with $19 million." Then Mr. Obama says, "You've got corporate executives who are giving themselves million dollar golden parachutes and leaving workers high and dry. That's wrong. It's an outrage."

What's wrong is the ad. Alan Fishman became CEO of Washington Mutual on Sept. 7 after a $7.5 million signing bonus was used to get him to make that precarious job change. But it is not at all clear that Mr. Fishman is entitled to keep that signing bonus much less a hypothetical 2009 bonus and other items some creative journalist used to fabricate that bogus $19 million figure.

Mr. Fishman was not CEO long enough to be blamed for "leaving workers high and dry." Neither was the CEO of AIG, Robert Willumstad, who turned down a $22 million severance payment that was surely used to lure him into that insecure assignment.

Most top executives who were actually in charge during the craze of overinvestment in mortgage-backed securities have been fired. Executives who are fired are not in a position to be "giving themselves" anything.

In reality, top executives are mainly paid by accumulating a big stockpile of company stock and stock options. Estimates of annual CEO pay that Congress and the press have been focusing on look as high as they do only because of the high value of restricted stock or stock options at the time.

When Martin J. Sullivan resigned from AIG in July, the bulk of his golden parachute consisted of AIG stock valued at about $28 million. On Sept. 21, the New York Times showed what had happened to the value of such shares since the beginning of 2007. In Mr. Sullivan's case, his AIG stock had already dropped to $173,000 by Sept. 19. The magical market produced reverse alchemy, turning golden parachutes into lead.

Hank Greenberg built AIG into a trillion-dollar firm from 1968 to 2005, when he was ousted by New York Attorney General Elliott Spitzer for spurious reasons. Mr. Greenberg's 11 percent share of AIG stock had dropped to $49.6 million from $1.25 billion by Sept. 19 and has fallen even more since then. Mr. Greenberg's fortune took decades to build, but the punitive Treasury "bailout" knocked it back down in a few days.

James Cayne, former CEO of Bear Stearns, has lost $980.8 million, according to the New York Times. A Newsweek blog nonetheless claimed Mr. Cayne had a "payout" of $61.3 million - far from being a golden parachute, that just means that's all Mr. Cayne's stock is still worth.

Nearly all financial stocks turned to trash after Treasury Secretary Henry M. Paulson Jr. began "bailing out" firms like Bear Stearns and AIG by wiping out their stockholders.

When the government took over Fannie Mae (for unexplained reasons) the stock immediately dropped from $7 to a few cents a share, leaving the former CEO, Daniel Mudd, with $476,000. The former CEO of Freddie Mac "walked away" with $130,000. Other stockholders took a big hit too, of course, including huge mutual funds and pension funds.

The political impulse to demonize a few CEOs "who got us into this mess" is understandable but unreasonable. The world financial crisis involves far too many banks and insurance companies in too many countries to be explained as a sudden epidemic of personal irresponsibility. Greed is a constant, not a variable, so greed can never explain why things get better or worse.

The extent to which banks all over the world had used borrowed money to invest in mortgage-backed securities was a huge surprise, as was the perceived risk now attached to even the best of those securities.

Most CEOs of failed financial firms have been fired and lost millions. There has been no such "tough love" accountability for those paid to watch out for such problems - including credit-rating agencies, stock analysts and a Congress too bemused with egotistical theatrics to exercise its responsibility for oversight of the blundering Securities and Exchange Commission.

• Alan Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth."