Banks Paying a Price for Their Epic Greed

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted July 23, 2008.

Doctors. Lawyers. Architects. A decent society certainly needs them all. But what about bankers? Is banking also a necessary profession? Or is banking merely a grubby game where the few enrich themselves at the expense of the many?

These days, the answer seems fairly obvious. We've simply seen too much enriching at our expense -- bank mergers that have transformed local banks into faceless fronts for faraway corporate empires, escalating "fees" that bleed our checking and savings accounts, subprime mortgage shell games that devastate entire neighborhoods.

Now banks appear to be paying the price for this great greed grab. One giant Wall Street investment bank, Bear Stearns, has already tanked. Citigroup, America's largest bank, last week posted a $2.5 billion quarterly loss. Share prices in the banking industry have tumbled down 50, even 60 percent and more.

Bank boards of directors, amid this turbulence, are scrambling to find shining knights who'll rescue them -- and they're offering fabulous rewards to give these power-suited knights an incentive to succeed.

Earlier this month, for instance, Wachovia, the nation's fourth-largest bank, brought on a new chief executive, former Goldman Sachs alum Robert Steel, with an pay package that could be worth over $38 million. Citigroup's new chief exec, Vikram Pandit, joined the banking giant last year after Citigroup shelled out $800 million to buy the hedge fund he had started the year before. That transaction netted Pandit $165 million. Then this past January, a month after elevating the India-born Pandit to CEO, Citigroup awarded him a stock incentive package worth another $30 million, a sum, the Economic Times of India has noted, that equals nearly six times what all India's banks taken together last year paid their top executives.

To American "expert" eyes, incentives this lush make perfect sense. "That's nothing," as University of North Carolina-Charlotte finance prof Tony Plath told a reporter when asked about the $38 million for Wachovia's new CEO. "You pay him whatever you have to in order to save the bank at this point."

Give new superstars enough incentive to succeed, in other words, and banking's woes will all work out. This analysis has just one inconvenient flaw: Windfall incentives for bank CEOs created those woes in the first place.

Bankers, of course, have always endeavored to make money. But in generations past, long before subprimes, many bankers considered banking more than a money chase. These bankers saw themselves, explained the New Yorker earlier this year, as professionals engaged in a "sacred trust, an enterprise that embodied values superior to the merely material."

Novelist Louis Auchincloss, a most perceptive observer of America's most privileged, captured this perspective years ago in a book he set in the 1930s.

"Banking isn't just money-making," Auchincloss had one banker telling another. "Banking is starting new businesses and saving old ones. Banking is helping the right-man over a bad time. Banking is keeping the heart of the economy pumping. If you don't feel that way about it, you ought to quit and become a stockbroker."

Auchincloss's banker hero was fighting a noble but losing battle. The money-makers had overrun banking in the 1920s, a go-go financial era much like our own. Their excesses would eventually help usher in the Great Depression.

The New Deal, in response, would ultimately curb the "just money-making" spirit by rigorously regulating how bankers do business -- and raising taxes substantially on income in the highest tax brackets, a move that tended to dampen incentives to push the regulatory envelope. After all, why take risks to earn extra millions if Uncle Sam was just going to tax the bulk of those extra millions away?

But these New Deal-era regulations and tax rates started shriveling in the 1980s. Banking's most ambitious soon had all the motive and opportunity they needed to bust whatever remained of banking's "sacred trust." And bust they did.

Wachovia offers a prime example of how the busting process unfolded. Today's Wachovia loves to celebrate its down-home North Carolina local roots. These roots do go back just over a century, to the day when H. M. Victor set up banking shop at a roll-top desk in the lobby of Charlotte's Buford Hotel. By 1958, Victor's operation had become a thriving statewide enterprise, the First Union National Bank of North Carolina.

But Victor's baby would grow no further for another generation. State and federal regulations prohibited bank operations in one state from buying up banks in another. These regs kept banks relatively local -- and rewards for bank execs relatively modest.

That all changed in the Reagan years. Ronald Reagan would sign into law tax cuts that sheared the top tax rate on income in America's highest tax brackets from 70 to 28 percent. Corporate America's movers and shakers would rush to take advantage, and Congress would oblige -- by rewriting the nation's economic rulebook.

Between 1982 and 1994, lawmakers swept away all the federal prohibitions against multi-state banking. Banking executives could now legally assemble national banking empires, and they raced to do so. They had a powerful incentive. Bigger banks meant bigger rewards for the executives who ran them.

Bigger banks even meant bigger rewards for the executives who lost their top executive perches as big banks gobbled up banks not as big. One example: In 2004, Wachovia acquired SouthTrust in a takeover deal that guaranteed SouthTrust CEO Wallace Malone Jr. $59 million "in termination awards, stock awards and options" if he left the newly merged bank in the next five years, plus a $3.8 million annual pension. Malone did leave, early in 2006 with a parting package worth $135 million.

In all, between 1985 and 2007, wheelers and dealers engineered over 100 mergers and acquisitions to create the Wachovia that exists today. Among the biggest: the $25.5 billion purchase of subprime mortgage lender Golden West Financial in 2006, just before the subprime market started nosediving.

The Wachovia CEO who engineered this appalling blunder, G. Kennedy Thompson, lost his job this past June. He "retired" with a $34.5 million exit package after earning over $44.3 million in his eight years as Wachovia's top exec.

Thompson, to be sure, doesn't owe all these rewards to his prowess at wheeling and dealing. Under his leadership, Wachovia also perfected "ever-more-creative ways to 'fee' us to death," notes MSN Money analyst Liz Pulliam Weston. Wachovia, Weston revealed last year, has figured out how to hit customers with bounced-check fees even if they actually have enough money in their accounts to cover the checking transactions. Fees, to be fair, are increasing throughout the banking industry, not at just Wachovia. The average ATM service charge , SmartMoney reported last week, "doubled between 1998 and 2007."

Today's bankers see nothing amiss with all this fee-gouging. Surely somebody, they understand, has to pay for America's banking meltdown.

See more stories tagged with: banking, fees, wachovia

Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.

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