Sunday, January 13, 2008



Though no one has the precise figures as of this writing, it appears as if Countrywide Financial CEO Angelo Mozilo will emerge from the misguided Bank of America purchase of Countrywide, which was prompted by the imminent failure of Countrywide and God know what else (See the last post “It’s Not Like these CEOs Have Big Egos or Anything,” 1/11/08), with about $70mm in cash and stock. The Wall Street Journal, the Pravda of the American corporocracy, reminds its readers that, if Mr. Mozilo gets no bonus this year, only $36mm of that $70mm is in the form of cash severance. (Of course, if Mr. Mozilo does get a bonus for the stellar job he has done with Countryside this year, his cash severance, and his entire farewell gift, will be larger.) The rest of the $70mm adieu gift is composed of pension benefits, which Mr. Mozilo would have gotten even if he hadn’t run Countrywide into the ground, and restricted stock and stock options, which were given value by B of A’s purchase of Countrywide. Doubtless we are all grateful to The Wall Street Journal for that clarification.

A Countrywide spokesman defended the pay package for Mr. Mozilo, stating that “During the past four decades, the company Mr. Mozilo founded has created tremendous value for shareholders and has provided millions of families with an opportunity for home ownership.” He didn’t add “many of whom who had no business being homeowners in the first place” after “families” in the above statement. Nor did he add “and provided the pathway to bankruptcy for millions of people who have no more idea how to manage their finances than Pairs Hilton has of social propriety” at the end of the statement. But I digress. To the extent that Countrywide has made shareholders rich (not lately, one might add) and/or provided the opportunity for homeownership, it has not been Mr. Mozilo who has done so. Countrywide’s employees had something to do with whatever success the company enjoyed, including the employees who lost their jobs, with no more than a few months' severance, due to Mr. Mozilo’s mismanagement.

Several points come up in the wake of Mr. Mozilo’s goodbye kiss. First, a very minor point: could bailing out his pal Angelo Mozilo have had anything to do with Ken Lewis’s decision to have his shareholders buy Countrywide Financial? After all, the boys in the club have to take care of each other, at least when they can do so with other people’s money, don’t they?

A larger point is that Mr. Mozilo’s au revoir gift, when combined with those of Stan O’Neal at Merrill, Chuck Prince at Citi, and numerous other corporate executives who failed miserably at the helm of the companies they nominally managed and thus cost their shareholders billions and many of their employees their livelihoods, increasingly gives the lie to the notion that, in our economy, the most productive citizens make the most money. If ours were a free market economy, this would be true. But, with the help of insouciant shareholders and a growing and bloated government in the hands of politicians on the take, our economy has evolved, in a relatively short period of time, from a free market economy to a corporate kleptocracy, or corporocracy. Big corporations often make decisions on who gets paid what on the basis of little other than personal relationships and a haunting feeling that those ladling out the largesse might be the next people in line for their hefty chunk of shareholder money.

If the above is true, the ramifications are frightening. First, public policy is based on the supposition that we continue to live in a capitalist, rather than a corporatist, economy. In a free market situation, it makes sense to keep tax rates low on the highest incomes because doing so provides incentives for the most productive people to work harder and thus expand the economic pie. I used to make that argument back when it was true. But now that there seems to be no logic, at least in the corporate world, which is, after all, gobbling up a larger share of the economy, to who gets paid what, the “keep rates low at the high end to keep the economy healthy” argument has less and less merit. The problem is that the realization that the “best paid are the most productive” argument no longer holds true might lead our policymakers to pursue “soak the rich” policies (Who wouldn’t like to sock it to Angelo Mozilo, Chuck Prince, Stan O’Neal, not to mention, say, Barry Bonds (but that is another argument) about right now?) that might harm the economy by discouraging hard work among those highly paid who remain the most productive, e.g., small business people, entrepreneurs, medical doctors, etc. At the very least, these fuliginous, but always very generous, corporate pay and severance packages lead to further economic deterioration, income disparity, and class warfare.

More important is the long term impact on our economy of abandoning the capitalist model for the corporatist model. If indeed we no longer reward people in proportion to their efforts but rather in proportion to their standing in the corporate and/or Wall Street “club,” we discourage the most productive and reward the indolent and incompetent but well connected. This will surely lead to our economic ruin.

People console themselves by arguing that the free market will ultimately prevail and thus that a corporocracy cannot last forever. Yes, but, given the size of government, the indifferent population, and the grip the corporations hold on our economy, the corporocracy can last a long time. Second, when the corporocracy falls of its own weight, the transition will be far from painless; the consequences for our economy and our nation will be tumultuous.

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