Samuelson: “it is becoming clear that capitalism’s most dangerous enemies are capitalists”—our conclusion: capitalists like Romney

“WASHINGTON — Amid the mayhem on world financial markets, it is becoming clear that capitalism’s most dangerous enemies are capitalists,” writes Robert Samuelson in a realclearpolitcs.com article titled Wall Street Elite Put Capitalism at Risk

No one can have watched the “subprime mortgage” debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost CEOs their jobs — and they left with multimillion-dollar pay packages. Stanley O’Neal, the ex-head of Merrill, received an estimated $161 million.

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It’s not as if these CEOs weren’t compensated in all those years. If you leave your company in shambles — with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders — do you deserve a gold-plated sendoff? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy […]

[…] By “Wall Street,” I mean all the commercial banks, investment banks, mutual funds, hedge funds and the like that comprise the financial sector — but particularly investment banks. Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. But pay is also heavily skewed toward annual “bonuses” based on the profits that traders and bankers generate. I asked Johnson Associates, a compensation consulting firm, for typical Wall Street pay packages. The results describe “managing directors” based in New York with 10 or 15 years experience. Most would be in their 40s.

Here are estimates for 2007:

Investment banker: $2.1 million, consisting of $275,000 in base pay plus $1.2 million in cash bonus and $625,000 in long-term bonus. (An investment banker helps firms raise capital by selling new stocks and bonds and also advises on mergers and acquisitions.)

Bond trader: $1.525 million, with $240,000 in base pay, $975,000 in cash bonus and $310,000 in long-term bonus.

Hedge-fund manager: $1.85 million, split between a salary of $265,000 and $1.585 million bonus […]

[…] But Wall Street also frequently misallocates capital and credit. The “tech bubble” of the late 1990s was one episode. Now we have subprime mortgages. Why? Well, the herd mentality of financial crazes has a long history. But compensation practices skewed so heavily toward bonuses based on annual profits make matters worse.

“People self-select for careers. On Wall Street, they self-select for the money,” says pay consultant Alan Johnson. “Wall Street is a sales business — they sell bonds, securities, transactions, ideas. … They’re not paid to be long-term, philosophical, reflective.” The pressure is to do the next merger, sell more stocks and bonds, do more trading — whatever boosts current profits and bonuses, the long-term consequences be damned […]

[…] But if the subprime failure turns out to be a preamble to a larger financial breakdown, flowing from the creation of new securities that offered short-term trading possibilities but whose long-run risks were underestimated, then the mood could turn uglier. Indeed, many Americans may conclude that capitalism has run amok […]

Precisely.

What does this have to do with Romney? Everything. Quite simply, everything. As we wrote before, Romney’s cohort of mangers and specialists that began their careers in the financial services industry in the 70s have come of age; they are taking their places in our highest echelons.

Permit us to quote from an earlier contribution:

“That’s the good news for America [i.e. the Democrats backing away from a defacto isolationism]. The bad news for the GOP is that once Iraq goes from being the top headline, the economy is the next issue. And, indeed, with casualties falling, Americans are focusing on the economy,” writes eye in an eyeon08.com post titled economy most important issue?

Yes. About the economy:

“The two appointments [to the federal reserve] come after six tortured months in the credit markets that have included sub-prime debacles, a Congressional crackdown on taxes in the private equity industry, and increasing involvement of the Fed in bailouts,” writes Heidi Moore in a Financial News Online-US article titled Wall Street experts invade Washington

The two appointments Moore refers to are:

Stephen Friedman, former co-chairman of Goldman Sachs, currently co-chairman of Stone Point Capital

-and-

John A. Canning Jr., co-founder of Madison Dearborn Partners

Friedman and Canning will “take the respective helms of the two most powerful branches of the 12 banks of the Federal Reserve.” You may not know these two gentlemen. But Romney knows them. And they know Romney. Back to Moore:

… The Federal Reserve under chairman Ben Bernanke has become more involved in Wall Street bailouts and cash infusions amid the credit crunch. The Fed last week injected $41bn (€29.9bn) in the markets to guarantee liquidity, and Bernanke also supports the creation of the $80bn master liquidity enhancement conduit that will sop up assets from troubled structured investment vehicles …

Translation: using taxpayer money—public funds—to recoup private losses in the private equity sector. Back to Moore:

… In addition, some prominent former Wall Streeters hold unprecedented influence in Washington. Hank Paulson, the Treasury Secretary and former Goldman Sachs chief, has spearheaded initiatives to revamp US laws that allegedly hinder competitiveness …

Translation: initiatives to emancipate capital flows from their bondage to local procedures for adjudicating among rival claims—i.e. states, nations, communities—more privatizing gains; more socializing the costs and the losses. Back to Moore:

… The crop of current presidential candidates includes Connecticut Senator Chris Dodd, who heads the Senate banking committee, as well as Bain Capital founder Mitt Romney. New York Mayor Michael Bloomberg has also been rumored as a candidate …

We have harped on this string before—see: Romney and private equity: the new ruling class. As much as we wish it were so, Romney is not an aberration. He and his peers represent the most advanced sector of a new class of professionals—the product of the revolution in financial services that began in the late 70s, early 80s—that have come of age and are now taking their places in senior executive positions. Most of them are comfortable working behind the scenes—not Romney.

The equity sector is capital at the limit of its development—it is capital negating itself as capital, as it is capital without owners in any conventional sense—it is capital in the form of vast pools of spare money or other instruments managed by technical adepti and professional elites. (Drucker famously refers to capital at this level of development as “pension fund socialism.”)

The equity sector gives us the notion of the “business audit”—imagine a pension fund that has bought into a retail chain. Say also that the chain is too big an investment for the pension fund to allow to fail. So: on the basis of a business audity, the fund—the effective “owner” of the retail chain—supplies the technical and managerial expertise to “turn-around” the retail operation. Does this sound familiar? If you’re a Romney observer, it should. It should sound like Romney’s Bain Capital. It should also sound, sadly, like what Romney wants to do with our government (see his interview with Carney that we discussed here).

The equity sector elites are already plundering our treasury to pay for their losses—but how can politicians refuse their demand for relief?—so much of the equity sector is composed of pensions, mortgages, savings instruments, public and private debt, in other words, the moneys, properties, and pensions of the middle classes and the elderly—equity sector money is, in a sense, public money already, only it is public money that disproportionately benefits the class that disposes of it—hence: Romney’s millions.

Imagine a professional class with direct access to our treasury. Imagine a professional class that has the power to tax you—this is the so-called private equity sector. (Not since the central-storage economies of absolute antiquity has economic and political power been this unified or concentrated.) Imagine what this new defacto ruling class will do once of their own sits upon the US presidential dais? This would be corruption on a scale that eye hath not seen, nor hath ear heard.

We have harped on these sad strings for weeks. Our point: Romney, the equity sector, the global crash, the collapse of the GOP and its institutions—these are all related. No, we don’t mean to suggest that they are related in some sort of grand conspiracy; not in the least. Rather: we would argue that they are all the surface irritations of larger, and necessary, historical developments.

yours &c.
dr. g.d.

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  1. 1 Romney in FL wants credit for being a major player in the financial services sector—at the very moment that that sector is crashing and taking the US economy down with it « who is willard milton romney?

    […] And more on Romney’s relationship to the global crash: Samuelson: “it is becoming clear that capitalism’s most dangerous enemies are capitalists”—o… […]




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