The Plunderers

Who are they? You can be sure that they are not the pirates of yore. No, they are the corrupt pirates of Wall Street that devour the small to medium investors and leave them penniless. It takes a Madoff to leave the rich penniless.

Before 1980 corporations were able to get credit from commercial banks relatively easily. After 1980 the rise in interest rates forced corporations to seek out other sources of credit. As a result investment banks reappeared on Wall Street and became the controlling source of corporate money. Earnings projections had to be met or the stock price declined and their ratings dropped. This opened the corporation to a “hostile takeover” and further upset. In order to survive a corporation had to be highly competitive and able to bring a technology to the market that appeared “indispensable”. So in order to obtain venture capital, the corporation had to convince the source of money that it had the skills and talent to provide a high return to the investors. Once a capital institution was convinced, huge amounts of money became available and the new young entrepreneur became instantly and phenomenally rich.

What was the difference between the entrepreneurs of old and the new leaders of business? The “old boys” were hard workers, concerned about the customers and the company’s share of the market. All of this took time and effort. The new young entrepreneur was rich before the business was successful. All he needed to convince the venture capitalist to invest was a viable business plan, sometimes an innovative patent and the right connections. The money then rolled in the door. And since the CEO of this potentially successful business had no self-image problems, he paid himself a huge salary. Instead of pursuing the interests of the company, i.e. the welfare of the customers, employees and shareholders, the CEO looked upon himself as “numero uno”. He was the only one that counted. In short, every man for himself became the pattern. CEOs moved from one company to another attracted by higher salaries and bonuses. Their riches were shameful.

However, in order to maintain that style of life, companies resorted to cooking the books, fraud, corruption and criminality. The company became for some CEOs an unlimited ATM machine, brazenly availing themselves of millions. It was pure and simple looting. They looted their own corporations and the corporation under their leadership looted their employees, their customers and their shareholders. The end result was that everyone except the CEO wound up penniless. Some of the tragic examples are Enron, Tyco and WorldCom. No one blew the whistle, neither the reputable accounting firms nor the rating agencies.

The belief that corporations and financial institutions are capable of policing themselves is a fantasy. Regulators’ refusal to regulate opened the doors to looting for private profit and eventual criminality. Jeff Skilling, former CEO of Enron with a Harvard Masters Degree in Business Administration, was convicted of multiple counts of fraud and was sentenced to 24 years in prison. He fought aggressively against government regulation.

Here’s some “breaking news” that will shock your socks: The CEO of Merrill Lynch, while the company was seeking financial help, was paying his chauffeur $230,000 a year and was redecorating his office at a cost of $1.2 million which included a $35,000 elevated commode. And this was going on at the time of huge layoffs at Merrill Lynch. The purchase of Merrill Lynch by the Bank of America has caused a major crisis for the bank. The stock price has dropped precipitously and the dividend will probably be cut. This will force the price even lower.

Now the CEO of Merrill Lynch has been asked to leave by the CEO of Bank of America because of additional losses not revealed at the time of the merger. And the shareholders of the B of A are now considering forcing the CEO of B of A out because of lack of due diligence.

One wonders how A.P. Giannini (1870-1949), the founder of the Bank of America, originally called the Bank of Italy (1904) would react to the SOBs of Wall Street who are crippling his bank. It was the first bank in the early 20th century to offer banking services to the middle class rather than only the rich.

References:

Galbraith, James. The Predator State. 2008.
Wikipedia