It is one of those stories that is a natural for the Christmas season but often disappears early in the new year. In recent years both the business press and even the mass circulation media have been fascinated by the size of the bonuses some Wall Street traders receive. This Christmas tale, however, should not be forgotten. One need not be consumed with envy to suggest that both the size and the origin of these bonuses tell us that something is amiss with our economy.
The New York Times reported in early December that Wall Street firms will pay key traders and executives bonuses totaling about 100 billion dollars, a figure that approximately equals total federal expenditures on housing and education.
Not to worry or scold, say many of Wall Street's defenders in the media and government. Soon after the Times carried its startling revelations on bonuses, Henry Blodgett weighed in with an op ed piece defending the practice as the most efficient way to stimulate effort by talented individuals. Base pay is low and if this year's superstar fails to deliver the goods next year, no bonuses. Some professional sports teams take the same approach with aging or troublesome superstars, those so called "incentive-laden contracts."
It is obvious to the casual spectator what Barry Bonds or Brett Favre does to earn or not earn their millions, but the work of Goldman's crew is more mysterious. Blodgett might have spent more time asking if the Herculean labors these stars perform really benefit the rest of us. Economic journalist David Walsh, writing on the World Socialist Web Site, has provided some telling examples of Goldman's work. In the second quarter of 2006, it spent $2.6 billion for a 5% stake in the Industrial & Commercial Bank of China, the largest state-owned bank in that country. When the latter went public in October, Goldman reaped a billion-dollar windfall.
In many instances, firms like Goldman go beyond market speculation. They underwrite and publicize initial public offerings (IPOs) and orchestrate the massive business of mergers and acquisitions. IPOs manage to repay initial investors but often do not expand the capital base for firms. They do, however, often make large profits for these investors and the IPO underwriters. Goldman often also helps many public corporations go private. Management makes millions, but in the process investors and the public often lose access to vital information.
Investment bankers often become cheerleaders for ventures in which they have a substantial stake and are major contributors to a herd mentality from which they profit. Goldman's well publicized political ties, including Treasury Secretary Henry Paulson, give it more ability to attract clients and to pump up enthusiasm.
Mergers and acquisitions are another Wall Street specialty. Many of the most heavily publicized corporate mergers have made some investment bankers multimillionaires but have ended up being spectacular failures. The former AOL/Time Warner comes to mind. Most interesting, even when the market deems these mergers a success, the consumer often loses. Orono-based writer Wayne O'Leary pointed out in these pages that industry structure plays a much-neglected role in determining the price of oil. External factors, like China's growing demand and natural disasters play are important but cannot provide the full explanation. The infamous Seven Sisters might now be dubbed the fortunate four. Informal collaboration becomes much easier and more likely as players diminish, with cuts in supply and higher prices the result. It is not surprising that Exxon Mobil recorded the largest ever corporate profits last year of $36 billion.
Regardless of the role that formal or informal collaboration may play in these profits, it is clear that a very few individuals have inordinate control over our energy future. Industry apologists justify such profits with the argument that they provide the funds to invest in both oil exploration and alternative technologies. But with so much money is concentrated in so few hands, ExxonMobil is best seen as creating a market as much as responding to market forces. It will play a more substantial role than consumers in our energy future.
Estate taxes, anti-trust enforcement, excess profits taxes on oil giants, and progressive income taxes are not a matter of envy or class war. They are about redressing monopoly and market manipulation that compounds privilege and shuts out the new ideas and initiatives on which our system depends.
Democrats need to address such immediate inequities as our pitiful federal minimum wage, but they also must explore some of the long term factors that foster dysfunctional inequities in our political economy.
John Buell lives in Southwest Harbor, Maine. Email jbuell@prexar.com.
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