Crony States of America – Wall Street Firms are Trying to Hide Payoffs Made to Employees Entering Government

“There is a lot of work ahead for the management to recover its reputation.”

– John Whitehead, Ex-Goldman Sachs Chairman, in a 2010 Wall Street Journal interview

Goldman Sachs may need to work on its image. This year, the firm beat recall-riddled General Motors along with Koch Industries and BP for the dubious distinction of worst corporate reputation, according to a new poll. Market research firm Harris Poll on Wednesday, Feb. 4, published its 16th annual ranking of the 100 most visible companies in the U.S., sorted by how positively the general public viewed them, and Goldman landed at the bottom.

– From the Bloomberg article: America’s Most Loved and Most Hated Companies

Citigroup is one of three Wall Street banks attempting to keep hidden their practice of paying executives multimillion-dollar awards for entering government service. In letters delivered to the Securities and Exchange Commission (SEC) over the last month, Citi,Goldman Sachs and Morgan Stanley seek exemption from a shareholder proposal, filed by the AFL-CIO labor coalition, which would force them to identify all executives eligible for these financial rewards, and the specific dollar amounts at stake. Critics argue these “golden parachutes” ensure more financial insiders in policy positions and favorable treatment toward Wall Street.

– From the New Republic article: Wall Street Pays Bankers to Work in Government and It Doesn’t Want Anyone to Know

The following post covers three important and related articles demonstrating and highlighting the criminality and corruption that has come to define the U.S. economy in the post bailout years. It’s a big part of the reason why the so-called “recovery” has been so uneven, and why there is record inequality.

Yet no one wants to admit this, because the meme is that government must intervene directly to solve the inequality. Why should we expect them to solve something that their own corruption created?

First, from the New Republic article, Wall Street Pays Bankers to Work in Government and It Doesn’t Want Anyone to Know:

Citigroup is one of three Wall Street banks attempting to keep hidden their practice of paying executives multimillion-dollar awards for entering government service. In letters delivered to the Securities and Exchange Commission (SEC) over the last month, Citi,Goldman Sachs and Morgan Stanley seek exemption from a shareholder proposal, filed by the AFL-CIO labor coalition, which would force them to identify all executives eligible for these financial rewards, and the specific dollar amounts at stake. Critics argue these “golden parachutes” ensure more financial insiders in policy positions and favorable treatment toward Wall Street.

Who do these shareholder peasants think they are?

“As shareholders of these banks, we want to know how much money we have promised to give away to senior executives if they take government jobs,” said AFL-CIO President Richard Trumka in a statement. “It’s a simple question, but the banks don’t want to answer it. What are they trying to hide?”

The handouts recently received attention when Antonio Weiss, the former investment banker at Lazard now serving as counselor to Treasury Secretary Jack Lew, acknowledged in financial disclosures that he would be paid $21 million in unvested income and deferred compensation upon exiting the company for a job in government. Weiss withdrew from consideration to become the undersecretary for domestic finance under pressure from financial reformers, but the counselor position—which does not require congressional confirmation—probably still entitles him to the $21 million. The terms of the award are part of a Lazard employee agreement that nobody has seen.

Somehow I missed this angle to the Antonio Weiss sage. Truly remarkable.

These payments are routine at major banks, several of which have explicit policies, found in filings with the SEC, outlining automatic awards for executives who rotate into government. Goldman Sachs offers “a lump sum cash payment” for government service, for example.

That’s the most Orwellian use of the word “service” you’ll ever encounter.

“It fuels the revolving door between banks and the government,” said Michael Smallberg, an investigator for the Project On Government Oversight (POGO), whose 2013 report detailed these types of compensation agreements. The average executive branch salary is substantially less than these millions in awards, so the bonuses effectively supplement the lower pay, raising questions about who the government officials actually work for.

As if there was any question.

Citigroup is a serial user of these practices, if only because so many of its alumni serve in government. Jack Lew, Weiss’ boss at Treasury, had$250,000 to $500,000 in restricted stock vested after he left an executive position at the bank, part of a $1.1 million golden parachute revealed during the confirmation process. Stanley Fischer, currently the vice chair of the Federal Reserve, had a similar clause in his Citigroup employment contract. U.S. Trade Representative Michael Froman received over $4 million in multiple exit payments from Citigroup when he left for the Obama Administration.

Aren’t you glad we bailed them out?

Of the four banks with explicit golden parachute policies (the others have discretionary policies on a case-by-case basis), only JPMorgan Chase has not asked the SEC to exclude the AFL-CIO’s proposal. According to Slavkin Corzo, Citigroup never so much as reached out for a conversation before filing the SEC request. The letter is dated December 19, 2014, just a week after a provision written by Citigroup lobbyists repealing derivatives rules in the Dodd-Frank Act passed Congress.

The SEC oversees the shareholder proposal process, but in a strange, passive-aggressive fashion. A rule dating back to the Securities and Exchange Act of 1934, Rule 14a-8, defines how a proposal can be placed on the ballot. Corporations use all sorts of well-honed arguments to disqualify proposals from a vote under Rule 14a-8. Then they send a “no-action” letter to the SEC to get clearance to exclude the proposal. “The company requests that the SEC will not take any enforcement action against the company if they don’t put the proposal on the ballot,” said Slavkin Corzo. “It’s a bizarre intermediary world that has built up around the entire process.”

But, as the AFL-CIO’s response states, though the shareholder proposal requests the names of all “senior executives,” Citigroup wants to narrow the playing field to merely “named executive officers,” which for them would only be five people. Citigroup wrote in a footnote in their no-action letter that they “interpreted the phrase ‘senior executives’ to refer to its named executive officers,” which the federation believes varies from the SEC’s definition of senior executives. Jack Lew and Michael Froman, who received golden parachutes for government service, would not fall under this named executive officer standard.

Later in the no-action letter, Citigroup actually cites an article by New York Times columnist Andrew Ross Sorkin, celebrating the golden parachute payments as a way to “encourage public service,” as part of their argument. “The piece is nothing more than an opinion,” the AFL-CIO responds, and “irrelevant to the standard set by Rule 14a-8.”

Andrew Ross Sorkin:

Nuff said.

Though the SEC values corporate disclosure, according to Slavkin Corzo, it has leaned more in favor of corporations over shareholders on these requests. A 2013 Project on Government Oversight report found that SEC alumni often represent companies trying to kick shareholder proposals off the ballot. For example, Martin Dunn, a 20-year SEC veteran who worked for the division that decides on no-action letters, became a corporate lawyer for O’Melveny and Myers, and repeatedly obtained favorable rulings from his former employer on behalf of Alaska Airlines, Yahoo, UnitedHealth Group and JPMorgan Chase.

Three things are certain in the U.S. economy: Death, taxes and the revolving door. 

The SEC will make a ruling on the no-action letters sometime in the next couple months. “It would be really unfortunate if shareholders are not allowed to get basic information about what’s being done with their money,” said Slavkin Corzo.

If it’s unfortunate, it will most likely happen.

Moving along, thanks to a recent poll by Harris Poll, we can definitively say that Goldman Sachs’ reputation, to the chagrin of the recently deceased John Whitehead (who appears to have been a decent man), has not recovered. In fact, it was ranked as having the very worst corporate image in the USA.

Bloomberg reports that:

Goldman Sachs may need to work on its image. This year, the firm beat recall-riddled General Motors along with Koch Industries and BP for the dubious distinction of worst corporate reputation, according to a new poll. Market research firm Harris Poll on Wednesday, Feb. 4, published its 16th annual ranking of the 100 most visible companies in the U.S., sorted by how positively the general public viewed them, and Goldman landed at the bottom.

Harris Poll surveyed 27,278 people to generate its list (pdf) of America’s most- and least-loved corporations. Wegmans, a Rochester (N.Y.) grocer whose fans write love letters to its stores, claimed first place, followed by Amazon, Samsung, Costco, and Johnson & Johnson. Halliburton, Monsanto, Dish Network, and AIG were near the bottom of the list.

Bottom 20:

1) Goldman Sachs
2) AIG
3) Dish Network
4) Monsanto
5) Halliburton
6) Sears Holding
7) Koch Industries
8) Comcast
9) Charter Communications
10) Bank of America
11) BP
12) Citigroup
13) General Motors
14) JPMorgan Chase
15) United Airlines
16) Time Warner
17) Walmart
18) DirecTV
19) ExxonMobil
20) Chrysler

Finally, I want to conclude with excerpts from an excellent Reason article, titled: Washington’s Parasite Economy.

“Bidding wars are breaking out. Foreign buyers are moving in. A new wave of contemporary architecture is taking hold. And a growing class of tech executives is helping to fuel the boom,” reported The Wall Street Journal’s Mansion section in 2013. “As other American cities have been buffeted by an uneven economy, Washington’s property market has been buoyed by two forces specific to the capital city: a surge of federal contractors and a rising tide of government spending. The result: what real-estate agents and developers are calling an unprecedented real-estate surge.” The number of homes selling at over a million dollars—over $5 million—is soaring.

A rising tide of government spending may be bad for the American economy, but it’s great for the Washington area. Washington is wealthy and getting wealthier, despite the very slow recovery in most of the country. Seven of the ten richest counties in America, including the top three, are in the Washington area. That partly reflects the fact that federal employees make substantially more money than private-sector employees—more than double at last count. And it also reflects the boom in lobbying and contracting as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.

Walk down K Street, the heart of Washington’s lobbying industry, and look at the directories in the office buildings. They’re full of lobbyists and associations that are in Washington, for one reason: because, as Willie Sutton said about why he robbed banks, “That’s where the money is.”

As Craig Holman of the Ralph Nader–founded Public Citizen told Marketplace radio after a report on rising lobbying expenditures during the financial crisis, “the amount spent on lobbying… is related entirely to how much the federal government intervenes in the private economy.” Marketplace’s Ronni Radbill noted then, “In other words, the more active the government, the more the private sector will spend to have its say… With the White House injecting billions of dollars into the economy [in early 2009], lobbyists say interest groups are paying a lot more attention to Washington than they have in a very long time.”

In the past few years I’ve had many occasions to write articles about Washington’s parasite economy sucking in another company—Microsoft, Google, Apple, and so on. It’s always the same story. Entrepreneurs get rich the only way you can in a free market: by producing something other people want. A lot of brilliant people work long hours producing computer software—or any other product—that millions of people choose to use, in the midst of a highly competitive market that offers lots of other options.

Then politicians notice the company’s success—and wealth—and begin circling around it. Competitors try to win in Washington what they couldn’t win in the marketplace. The lobbyists and congressional aides send messages through the media: “They don’t want to play the D.C. game, that’s clear, and they’ve gotten away with it so far. The problem is, in the long run they won’t be able to.” (A congressional aide re: Microsoft, 1998)

Nice little company ya got there. Shame if anything happened to it.

Well put. It’s a criminal, crony economy we inhabit, and unless we do something about it, it’s going to get a lot worse.

For related articles, see:

How Jack “Bailout Bonus” Lew Got to Treasury

The Revolving Door Spins Again – Former SEC Enforcer to Join Private Equity Giant KKR

Meet Mary Jo White: The Next SEC Chief and a Guaranteed Wall Street Patsy

Tim Geithner Admits “Too Big To Fail” Hasn’t Gone Anywhere (and that’s the way he likes it)

Wall Street Moves to Put Taxpayers on the Hook for Derivatives Trades

How Obama’s Chief Negotiators on the Trans-Pacific Partnership Treaty Received Huge Bonuses from Mega Banks

In Liberty,
Michael Krieger

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