Paul Nitze: Remembering what real talent looks like
October 21, 2009
Americans can tolerate the fact that they’ll never own a house in Aspen, or one of the planes sitting on the tarmac outside of town. But what they won’t swallow forever is a belief that the guys who have those houses and planes did very little to earn them. Culturally, we’ve been willing to accept a lot of inequality if it means opportunity, but that culture is starting to change.
Bruce Wasserstein, the feared and famous banker, died last week, and with him died a certain moment in the history of American capitalism. Wasserstein was a poster boy for the Age of Reagan, a time when a consensus formed around an unalloyed belief in low taxes, deregulated markets, and the freedom to get very, very rich through grit and guile.
Wasserstein certainly accomplished the latter – when he died his wealth was estimated at a touch over $2 billion, and his annual compensation put him near the top of his Wall Street peers. But what distinguished him from those who populate the corner offices on Wall Street these days was his startling talent.
A constant refrain during the financial crisis and the subsequent bailouts has been that “talent must be paid.” Any time Kenneth Feinberg or anyone else in government hints at clawbacks or caps on compensation, the Street defaults back to that mantra. Well, true talent deserves to be paid in pounds of gold, and Wasserstein had that talent.
Cuddly he was not. He could be brutal to those who worked with him, and he was derided often by those on the other side of the table. His predecessors on the Street resented him for turning a more genteel, relationship-driven business into a highly competitive world of financial engineering and legal brinksmanship.
Wasserstein and a group of his peers, such as Michael Milken and Stephen Schwarzman, stormed onto the Street in the late 1970s and early 1980s. They came from not all that much and got ahead through smarts and hard work. Milken, who was contemptuous of securities laws and later pleaded guilty to six counts of securities fraud, famously wore a miner’s headlamp on the morning school bus ride to read up on bond sheets.
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Wasserstein was the master of this new world. He invented a two-step tender that allowed DuPont to buy Conoco for less than a competitor had offered. He didn’t invent the “poison pill,” but he was its best practitioner, and mastered a range of other takeover defense tactics. Ironically, on Wall Street, the Age of Reagan often meant using the securities laws and regulations for unintended purposes.
Not every deal was a success. The Getty Oil and Nabisco deals lost money for his clients. But over the course of more than a thousand deals, he made much more money for his clients than he lost. He also put together an advisory business that he sold for $1.4 billion. A former college reporter, he cobbled together a magazine empire that he sold for a big profit. Lazard Freres, the firm he led up until his death, has returned more value to its shareholders than almost any other publicly traded investment bank since he took over.
Where are today’s Wassersteins? Wall Street is livid over the news, announced yesterday, that the president’s pay czar is planning to cap compensation at many of the banks that received bailout funds. But that’s just the tip of the iceberg. Forget about prospective compensation.
The real scandal of the bailout is that the same executives who destroyed their firms’ balance sheets stand to benefit if the stock prices of their employers recover. Even after the federal government pumped hundreds of billions of dollars into AIG, Citigroup, and almost every other major bank, executives were allowed to keep stock and options. In some cases they got new options priced near the bottom, so they can squeeze out the largest possible payday when stocks recover. Not exactly what they call going down with the ship.
Shareholders have almost no say in compensation. Directors are supposed to represent the shareholders, but they are generally under the thumb of the CEO. If shareholders want to reject a CEO’s pay package, the law provides no avenue for them to do so (with the exception of firms still holding TARP funds). Most corporate bylaws disallow even advisory proxy resolutions on executive pay.
In truth, market forces have little effect on executive compensation on the Street or among the rest of the Fortune 500. Guys like Ken Lewis and Bob Nardelli aren’t paid for performance. They’re paid for position.
Talent like Bruce Wasserstein’s is very rare. That talent was demonstrated over many years and many deals. When talent like that emerges, it should be rewarded. What passes for talent these days in executive suites is often mediocrity.
When compensation committees reward mediocre executives with massive pay packages, they deserve to be held accountable by shareholders. And when the federal government bails out firms, the firms’ executives should be last in line to benefit from the upside.
Paul Nitze is a deputy district attorney in Adams County and has been a part-time Aspenite his entire life. Before attending law school, he worked as a legislative assistant to another part-time local, Sen. Dianne Feinstein (D-Calif.).