More Stalling Tactics from SEC Chair Mary Jo White on CEO-Worker Pay Ratio

By Pam Martens and Russ Martens: August 6, 2015

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission, January 24, 2013

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission,
January 24, 2013

The Dodd-Frank financial reform legislation was signed into law five years ago to address the Wall Street abuses that led to the greatest financial crash since the Great Depression in 2008 and 2009. One of the requirements of that law was for the Securities and Exchange Commission to implement a rule making corporations publicly disclose the ratio of their CEO’s pay to the median worker’s pay.

Yesterday, after being publicly humiliated over not putting the law into force, the SEC finally adopted the rule. But it won’t go into effect until corporations complete their 2017 fiscal year, meaning it will be stalled for almost another three years.

Back on June 2, Senator Elizabeth Warren sent a scathing letter to SEC Chair Mary Jo White, berating her on a laundry list of broken promises. Warren told White: “You have now been SEC Chair for over two years, and to date, your leadership of the Commission has been extremely disappointing.” Among the long list of complaints was that the SEC Chair had failed to implement the CEO pay-ratio rule.

Two days ago, Richard Trumka, President of the 12.5 million member AFL-CIO, published an OpEd at CNN, furthering calling out the SEC for its foot-dragging. Trumka wrote:

“We have submitted a Freedom of Information Act request about the scheduling of final action on this rule. Nineteen organizations who represent investors and the public also submitted a letter in support of this request. In addition, petitions from more than 165,000 Americans demanding that the commission finally implement the CEO-to-worker pay rule were delivered to the SEC, and more than 1,000 calls placed as well.

“Public disclosures show that S&P 500 CEOs made 373 times the average rank-and-file worker in the United States in 2014. But we will not know the actual ratio at each individual company until the SEC enforces the CEO-to-worker pay rule.”

Stalling on regulatory rules has consequences. It gives Wall Street time to write its own legislation and find a compromised member of Congress to insert provisions to repeal the intended financial reform.

Take the so-called push out rule, where Dodd-Frank required those hundreds of trillions of dollars in derivative bets on the books of FDIC insured mega banks to be moved out of the commercial banking unit into non-insured affiliates.

That Dodd-Frank push-out rule had also been stalled from implementation for five years. Then, last December, Citigroup snuck legislation to repeal the rule into the must-pass $1.1 trillion spending bill needed to keep the country running. Congress and the President could have rejected this outrage but they didn’t. Congress approved the spending bill with the push-out rule repeal language intact and the President signed the bill into law.

Citigroup and other Wall Street banks are now able to keep their riskiest derivative gambles in the banking unit that is backstopped with FDIC deposit insurance, which is, in turn, backstopped by the U.S. taxpayer.

According to Bloomberg Business data, over the past five years – when Dodd-Frank financial reform was supposed to be making these mega banks safer – Citigroup has increased the notional amount of derivatives on its books by 69 percent. As of June 2014, according to Bloomberg, “Citigroup had $62 trillion of open contracts, up from $37 trillion in June 2009.”

Citigroup, of course, is known for three directly related fiascos and abuses of the public trust. In 2008, it held $1.1 trillion in off-balance-sheet assets. It blew up in the same year. It then proceeded to be propped up with the largest taxpayer bailout in U.S. history: $45 billion in equity infusions; over $300 billion in government guarantees; and $2.513 trillion cumulatively in below market rate loans from the Federal Reserve between December 1, 2007 and July 21, 2010.

Was there a connection between the reckless, highly suspect manner in which this mega bank conducted its affairs and the $785 million its CEO, Sandy Weill, sucked out of the bank in compensation over five years? In our opinion, there was indeed.

On May 6 of this year, author Margaret Heffernan spoke at the Finance & Society conference on a panel themed: “Other People’s Money: Governance, Integrity, & Ethics.” While Sandy Weill is living proof that there is no guarantee that obscene pay packages will deliver superior results from CEOs, Heffernan suggests it is highly likely to deliver perverse results. Heffernan told the audience:

“There’s another assumption in this which is performance-related pay is going to make people do a better job. This is not substantiated by the research. It just isn’t…I can find proof that it will make people run a little bit harder for about 15 minutes, but I can’t find the proof that over the long term, over time, it really delivers better work from more qualified people. But this has been a truism in all capitalist societies for a very long time. And it’s about time we started questioning some of these shibboleths because I would say that not only does performance-related pay not deliver superior results, I would say it almost guarantees inferior results because it encourages, incentivizes really some very perverse decision making.”

This is not some small matter to be taken lightly by Americans. The desire to move into the ranks of the obscenely paid on Wall Street led to obscene risk-taking which led directly to the 2008-2009 collapse of the financial system and the economy. The Nation is still feeling the economic impact of that hubris with stagnant GDP growth at or around 2 percent annually.

The Government Accountability Office (GAO) released a report in 2013 on the long-term impact that the 2008 financial collapse was likely to have on the Nation. According to the GAO, cumulative output losses could exceed $13 trillion. The GAO researchers wrote:

“Some studies describe reasons why financial crises could be associated with permanent output losses. For example, sharp declines in investment during and following the crisis could result in lower capital accumulation in the long-term. In addition, persistent high unemployment could substantially erode the skills of many U.S. workers and reduce the productive capacity of the U.S.”

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