Despite the denials of its new CEO, Wells Fargo had a serious, widespread cultural problem that led it to commit at least 2,000,000 financial crimes. But the crimes and the culture are widespread across America’s banks, and they spread further than that, because the system is rigged to reward financial crime.
To understand the systemic enticements to fraud in corporate America, you have to understand how execs can make unimaginable — and largely secret — rewards, in the hundreds of millions of dollars, by rigging the market, without any real risk of punishment, even when they get caught.
The Institute for New Economic Thinking’s Lynn Parramore identifies three sources of moral hazard that virtually guarantee fraud across the system: first, stock buy-backs, illegal until Reagan’s 1982 reforms, make execs and shareholders rich while starving their companies, by manipulating the stock prices. That’s why 449 companies out of the S&P 500 spend more than half of their earnings on stock buy-backs.
Second, the pressure to boost quarterly earnings is immense. Major shareholders — especially hedge funds — don’t care about the business’s long-term survival, just the quarterly numbers, and they structure executive compensation to reward self-destructive behavior. For example, execs get rich by selling all their business’s premises, declaring a dividend, and then renting those properties back from their new owners, virtually guaranteeing financial pain in the future.
Finally, executive pay is bizarre, opaque and nearly impossible to calculate. The standard for estimating how much an exec takes home is “estimated fair value” for stock options and awards. But there’s another metric: “actual realized gains,” which reflects “how much stock-based pay is worth at the time executives actually cash in.” When you calculate disgraced former Wells Fargo CEO John Stumpf’s take-home pay using the second metric, it jumps by 145%.
Even the most progressive organizations have been incorrectly stating CEO pay, says Lazonick. The AFL-CIO, for example, has long decried a ratio of CEO-to-average-worker pay of about 350:1. The actual figure, according to Lazonick’s research, is more like 700:1. He warns that people need to realize that they have been given false information.“Reporters and others who are questioning executives on these things just quote the wrong numbers. The executives must be laughing all the way to the bank. The ones who are doing all the buybacks and the price gouging and the scams to get their stock prices up are the same ones for whom the actual realized gains are far out-pacing this phony metric of estimated fair value. The public is being mislead.”
The actual numbers that determine what executives take home reflect stock price volatility — the kind of volatility that happens, for example, when a buyback or cross-selling scam jacks up the price.
No wonder executives are happy that nobody understands it. There’s no accountability if there’s faulty accounting.
Three Things to Know to Hold Wells Fargo Accountable
[Lynn Parramore/Institute for New Economic Thinking]
(via Naked Capitalism)
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, Vinod Thakur FX, CC-BY-SA)