Email Debate: Corporate Greed and the American Dream

Stephen is no fan of the Occupy protests, or the Occupy protestors, and made his feelings known during a mid-day email a few weeks ago to Matt after witnessing a cluster of agitators who had some negative things to say about Bank of America.  A lengthy email debate touching on the subjects of corporate greed and protest politics ensued. 

Stephen: Matt, so I just stepped out to grab lunch and there's a bunch of fools protesting Bank of America. One is holding a sign saying "Corporate Greed Stole the American Dream". Care to weigh in? Or will you join me in declaring such protestors as envious free riders who aren't contributing to the system out of pure laziness but feel entitled to something because they are at least mediocre at breathing.


Matt: No, I'm not going to endorse your view of the protesters, because I think you grossly misrepresent where these folks are coming from.  First, if they were that lazy, they wouldn't have taken the time to go and protest.  Second, where do you draw the conclusion that everyone who dares to protest a bank that overpays its executives, rushes to foreclose on troubled homeowners, and funds companies that blow the tops off of mountains is an envious free rider?

Stephen: Well I don't think it's very much their business if a bank decides to overpay its executives. The only ones who have the right to be outraged are the shareholders because they are the ones affected. If the shareholders are OK, then they think the CEO has done well and is being properly rewarded. Why is it your business if those with financial skin in the game are alright with the compensation package? And is a large compensation inherently greedy? As for them being lazy, they are most definitely lazy - instead of going out and creating value (which is how and why one is paid) they are just bitching. I have no sympathy, at all, for them.

Matt: CEO pay itself is another debate, but everyone has a right to protest if a bank is squeezing its customers (see $5 debit card fee that was ultimately waived), or refusing to write down troubled mortgages, while still paying its executives ridiculous sums of money.  If you have a mortgage with Bank of America or a bank account, you most definitely have financial skin in the game.  For that matter, if you even live in an area with high foreclosure rates, your local economy is most likely suffering as a result, so you've probably got some "skin in the game" there as well.  Let's not act like shareholders should rule the world. 

Secondly, how do you define who is "creating value"?  I would argue that anyone protesting to hold a bank accountable for its actions is creating a different kind of "value" by promoting a fairer society. 
 
Stephen: Sure, let's flag CEO pay for another time. As for the debit card fee, that's purely courtesy of Mr Obama's Financial Reforms, which play with card transacts fees that retailers are charged (big retail was the biggest proponent and beneficiary of that). Now, banks are losing money on issuing cards. That doesn't seem right. These companies don't and shouldn't exist to give you things you don't want to pay for. As for mortgages, yep if you couldn't afford it you probably shouldn't have bought it then bitched about it. If your mad that your home lost value, you should stay put of the financial markets if you can't handle a loss. Yea, losing money sucks but is it a banks fault you made a shitty bet? As for foreclosures, I live in Tampa so I certainly understand the economic reality of foreclosures everywhere...so much profit to be made as an investor in buying up those homes and renting it back out.

As for creating value; they are not holding corrupt individuals accountable. This would be like if instead of hitting the weight room, every time afoot all team lost they just protested the victors. Your "fair society" value add might be valid if society was unfair. Spoiler alert: things are pretty fair. 

Matt: My point is, if you're a bank and you're going to go and whine about losing money on issuing cards, maybe don't pay your executives so much.  If BofA decides that I, as a customer, should bear the brunt of that loss instead of their already well-paid executives, I have every right to protest. 

We obviously have diametrically opposed views on the foreclosure crisis - what about the predatory lenders who were pressed by the banks to offer mortgages to people they knew couldn't afford them?  Foreclosed homes might be great for investors, but it's awfully hard to buy up any home when you don't have a job/can't even afford your mortgage. 

I believe that American society is fundamentally fair.  But that doesn't mean there is no unfairness.  Do you believe wrongs should be righted, or written off?  If BofA or any other institution is doing things that make it more difficult for average people to succeed, they have every right to endure the criticisms of people who take the time to voice those criticisms. 
 
Stephen: Who is whining about losing money (outside of these protestors)? The banks are evaluating a service they provide and saying it costs them to provide it. If they don't make a profit, they won't operate at a loss, they'll just scale it back, or find another way to charge you for it. Ultimately, you will lose for not having the service if it becomes too much of a drain on profits from the bank. As for who should bear the brunt of the cost, why wouldn't the consumer of said product bear it? That make no sense. You want a service pay for it. Or will you be offering to work your job (a service) for free? As for predatory lenders, I can't stop stupid people from making stupid decisions. Time for them to take some accountability for their lives.

Matt: What I'm saying is that BofA justified (and you did too) the debit card fee on the grounds that they were being charged more for issuing cards and thus passed the cost along to the consumer.  But it's a question of where the money comes from to make up those costs.  It can just as easily come from an executive's paycheck as it can from my monthly statement with the bank.  The bank is absolutely whining if it acts like it can't bear to offer a service because of the cost, but can still find enough cash on its balance sheet to pay out lavish bonuses to its top executives. 

Stephen: That's absolutely ridiculous and greedy. You like a service but do not think you ought to pay for it; instead the CEO should solely because he makes more money? You realize that it costs money to operate a debit card business right? Now that the revenue for it has been limited curtsy of Obama (by did big retail scale back prices to account for this?) it is no longer profitable to offer. If you don't think having a debit card is worth $5 then get rid of it. You don't have to have one, right?

Matt: Ok - how are you defining profitable?  If by "no longer profitable" you mean that the company can't keep paying out huge executive bonuses while taking a hit on debit card revenues, then maybe you have a point.  But considering the general willingness of corporations to cut back on employee benefits and lay off workers when it comes time to cut costs, I'm pretty sure BofA could find a way to still turn quite a large profit on debit cards if it paid its executives less.  Instead, they choose to nickle and dime their customers.  In 1966, CEOs made 25 times the amount of money as the average worker.  Today, CEOs make nearly 200 times as much as the average worker.  And I'm greedy?  

Stephen: I thought we were going to save CEO pay, but it's irrelevant. By profitable I mean it costs say $8/month for BofA to give you a debit card, and they are making say $4/month on it. That's what I mean as profitable. And yea, I'm sure they will find another way to generate the difference because that's what they are good at, making money. And that's why the CEO's pay was accepted by 92% of all shareholders. Since his pay directly relates to their money. What you don't seem to get is that companies don't exist to squeeze profit margins thin, they exist to expand those margins. The more the CEO can get, the more shareholders want to reward him. What is unfair with that? Perfect meritocracy.

Matt: I'm well aware of the purpose of a business, but thanks.  Are you saying companies were never successful or made profits until CEO pay quadrupled - twice - relative to the average worker?  There are ways to be a successful company and reward shareholders without squeezing profits out of every last fraction of your business.  That's what the debit card thing ultimately came down to.  Bank of America makes plenty of money as a whole.  But I guess it comes down to who you side with.  If you tend to trust the already-powerful, and feel like they should be left alone to do what they will, then you probably will never have much sympathy for protesters exercising what little influence they have.  Are you ready to own that position? 
 
Stephen: Matt, everything you just said made no sense. This is probably why you can't grasp business and are convinced the government is effective. If a CEO isn't maximizing efficiencies (i.e. squeezing out every piece of profit) then he isn't doing a very good job, shareholders will likely wonder why there is waste, and this CEO will likely soon be no longer receiving any pay.

Yes, of course companies have been profitable before CEOs made this much, but hey again - if shareholders are OK with it, that's not my problem. They've deemed it worth some of their profits. Also, let's not forget that companies are near record profits, so why shouldn't CEOs who got them there be near record levels of compensation? As for workers, well those who remain in fields with plentiful labor supply do not see wage increases. Do I have to keep explaining how it works? Was any of this not entirely rational? 

Finally, for the debit card issue for the last time, it's a service there's nothing wrong with them charging. You are not forced to have an ATM card or bank with them. Exercise your desired power with your wallet instead of bitching about it, it just makes you seem greedy.

Matt: The argument comparing my "greed" to that of someone who's already rich falls extremely flat, since I earn multiples of $1000, not $1000000, every month.  But wanting to pay rent, buy groceries, transport myself to my middle-class job, and then maybe have some money left over without getting nickle and dimed by the place I trust to take care of my $... that's greedy, I know. 

As for your vision of ideal business practices, the problem is your view that the entire purpose of a business is to make money for its shareholders.  It really wasn't always like that.  It's a very modern (late 1970s-forward) interpretation of business that even Jack Welch, the former GE CEO who was one of its original promulgators, admitted during the recession was flawed.  Why?  Because there are people affected by a business other than shareholders.  If a business is making record profits, what do the shareholders care if it's laying everyone off, encouraging predatory lending, or otherwise screwing everyone over in the process? 

If a business can afford to compensate its CEO at record levels, can't it afford to expand, or hire more people?  I thought if the job creators got more money, they'd hire people.  It seems like the opposite is true.  They just keep it all for themselves.  That's why people are in the streets. 
 
Stephen: My bad, I was unaware that there was a magic threshold where you were then eligible to be greedy. I always had this crazy notion that greed was demanding that you get something you didn't deserve.

You're also absolutely correct about business models. I forgot that Henry Ford set up assembly lines to squeeze every last bit of efficiency out of his workers and really because he just had a thing for the aesthetic of lines. 

Finally, there's a difference between affording to expand and wanting to. Sometimes expanding isn't in the best interest if it will mean lower efficiencies. You understand profit right? Revenue minus expenses? Sounds like you are under the assumption that as long as expenses are going up revenue will too. Not always the case. Sometimes you have too many expenses and too many idle workers. Regardless if you are making windfall profits. Did that not make sense?

Matt: I'd argue greed is having enough of something but still wanting more even if you don't need it, especially if others need it more than you do.  Merriam-Webster agrees.  Maybe they have a liberal bias?

You know what Henry Ford also did?  Bucked convention by going against most of his industrial peers and paying his workers enough so they could buy his cars. 

Anyway though I'm loving the continued assumption that my liberal views must mean I don't understand economics.  Indeed, it's not always in a company's best interest to expand or hire.  And right now it's mostly not in anyone's interest because there's a serious lack of demand in the economy, because the middle class is crumbling.  Same issue we always come back to.  But I tossed the point out there anyway because it raises a valid question: if a business (a bank in this case) is sitting on record profits and not re-investing any of it, why should we take it seriously when it complains about the cost of writing down mortgages?  Why should we accept the idea that its taxes shouldn't go up?  And how can you possibly argue that those taxes need to be reduced further in order to spur "investment" that isn't happening? 
 
Stephen: I guess there is a wealth cut off for greed.  So what should we call those who feel they are more entitled to stuff than they should reasonably get?  Sounds like what I'd call greedy, but apparently you have to have too much already to be greedy.

As for Ford, we are getting way too much into the daily business of companies here but he had a very good economic reason to pay so well- it was too expensive to train new workers in their highly specialized assembly line position. It wasn't generosity, it was labor economics. 

As for reinvesting, if we are basing this on BofA, they aren't making record profits (but again, if shareholders of which I am one, are satisfied with the job of the CEO then his pay is justified).  Do I have to argue that a company must reinvest it now for tax breaks to be effective? What if companies sitting on cash now during low consumer demand is capable of unleashing rapid innovation and expansion once demand returns? If this was true, would your point completely fall apart?

Matt: Feeling entitled might not be a virtue, but according to the dictionary definition, which I would say is pretty authoritative, you do in fact have to have something already in order to be greedy.  It's difficult for me to accept the argument that poor or even middle-class citizens (which most of these protestors probably are) are greedy for being angry at a bank that defrauded everyone from individual homeowners to local insurance agents, urban municipalities, public and private pension funds, and fellow investors, all in pursuit of higher dollar figures. 

I agree there is no incentive for businesses to invest if there is no demand.  But if that's the case, how are we justifying keeping lower tax rates for the richest, if they're already low and nothing is happening?  Shouldn't we use that money to forgive mortgage debt, launch a federal jobs program, or find some other way of putting more cash back in the pockets of those who need to spend it for our economy to grow?  You say "once demand returns," but that doesn't just happen.  If you're going to argue against the deficit, but from a demand perspective, doesn't it make more sense to pay it down by raising taxes modestly on the wealthy than by cutting more services for people who already can't afford to buy anything? 

But the point, initially, was about those protestors.  I think they do themselves a disservice by protesting outside of a bank branch where normal people are just going to take out or deposit their money - it's misguided.  If you want to make that point, make it.  But the idea that Bank of America, which literally wouldn't exist if it weren't for the US government, doesn't deserve to be criticized for their shitty business practices?  If you were really an advocate for the free market itself, and not just for its pretend "winners," you would be cheering those protestors on.