Santa Claus Comes to Wall Street

Things have not gone well on Wall Street this year. Depending on the year-end news, the stock market looks at best to have eked out a small gain for the year. The record setting pace of mergers and buyouts in the winter and spring had dwindled to a trickle in recent months. And, some of the great citadels of Wall Street, like Citigroup, Merrill Lynch, and Morgan Stanley, have been forced to eat billions of dollars in write-downs on the complex financial instrumentals they had peddled to their customers.

The bad news also showed up in stock prices. Morgan Stanley's stock is down almost 20 percent for the year. Lehman Brothers stock was down a bit more than 20 percent. And Citigroup's stock price is down almost 50 percent from its level at the beginning of the year.

With a year like this, you might have expected that most of the Wall Street gang would be waking up on Christmas morning to find lumps of coal in their stockings. But, that's not the way that the modern economy works. According to The Associated Press, bonuses on Wall Street will be up a healthy 14 percent over last year . In a year in which tens of millions of families are struggling to pay their heating bills and hang onto to their homes, it seems that Santa still has a soft spot for the folks who cut deals on Wall Street.

It's questionable whether the stockholders of these companies really think that the people responsible for tanking their share price deserve a special year-end reward for performance. However, the stockholders don't have all that much say in the matter. Management generally gets to call the shots in corporate governance because they largely control the election process that selects the people who determine whether they stay in their job and how much they get paid.

Typically, corporations count unreturned shareholder proxies as supporting management's position. This means that if 30 percent of the shareholders (by number of shares owned) don't return their proxies, then management needs the support of less than one-third of the people who actually vote in the election to get their way. Suppose incumbents in Congress got to count all the non-voters as supporting their re-election. This is pretty much the way things work in corporate America, which is why shareholders now find themselves handing out big bucks to top executives no matter how badly they screw up.

Of course, it's not just the shareholders who are generous with the Wall Street crew. All of us, as taxpayers, have done our part to ensure that these folks have a happy holiday season. In particular, we deserve thanks because we gave hedge and equity fund managers a special tax break that allows them to pay a much lower tax rate than workers like firefighters and schoolteachers. The fund managers' tax break allows some of the richest people in the country to pay a tax rate of just 15 percent on their earnings, as compared to the 35 percent tax rate that they would face if they had to pay taxes like ordinary workers.

Congress did consider eliminating the fund managers' tax break this year, but a determined lobbying effort saved the day. The fund managers told Congress that if they had to pay the same taxes as everyone else, their hundred million dollar salaries would not give them enough incentive to work. Undoubtedly some sizable campaign contributions made this argument more compelling to members of Congress.

One of the leaders of this lobbying effort was Peter Peterson, an investment banker with the Blackstone Group, a private equity firm that earned Peterson and other partners billions when it went public this year. Mr. Peterson is primarily known for having spent much of the last fifteen years arguing for cuts in Social Security and Medicare for people like schoolteachers and firefighters. When arguing for these cuts Mr. Peterson routinely asserts that he does not need his Social Security. With the tens of millions in tax breaks he gets from the government, this is surely true.