While the American dream of home ownership has turned out to be merely a house of cards for hundreds of thousands of families, the costs of the mortgage crisis are not being shouldered equally by those at the top of the economic ladder.
Take Countrywide Financial, for example. The nation's top mortgage lender is scrambling to stay out of bankruptcy as its foreclosure and delinquency rates have hit a five-year high. But while many of the company's borrowers are facing the loss of their homes and their employees are worrying about losing their jobs, the executives who are largely responsible for building that house of cards have been lavishly rewarded.
Over the past three years, Chairman and CEO Angelo Mozilo has pocketed a whopping $142.4 million. Just last year, he made $42.9 million, a payout that made him the 6th-highest-earning CEO in the country. Fortune 500 firm chief executives overall made an average of $10.8 million in 2006.
And even as his company began to crash, Mozilo cashed in more than $100 million in stock options. Other top Countrywide managers also made out like bandits. The company's top five executives in total earned $323 million over the past three years.
Meanwhile, Countrywide was pushing the kind of risky, subprime loans with little to no down payment and ballooning interest rates that led to the current mortgage meltdown. Last week, New York Times columnist Gretchen Morgenson called the company "Exhibit A for the lax and, until recently, highly lucrative lending that has ... touched off a housing crisis of historic proportions."
The mortgage industry isn't the only one marked by extreme inequality. Private equity fund managers, for example, are raking in billions while forcing mass layoffs at many of the firms they acquire. Indeed, success in the sphere of private equity is often measured by the number of jobs eliminated. Stephen Schwartzman of Blackstone Group, for example, made $940 million last year. His fund's buyouts have resulted in cuts of 10 percent of the workforces at VNU, the parent of Nielsen Media Research, and at Travelport, the owner of Orbitz.
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With selfishness and greed running rampant, there is a growing public outcry for reforms to address the country's rising inequality. A recent Financial Times/Harris poll, for example, showed that 77% of Americans think that corporate executives earn too much. Public admiration for U.S. business leaders is at a pitiful 11%. And a majority does not oppose caps on CEO pay, a telling statement for a populace that supposedly reveres the free market.
One practical policy response would be to return to a more equitable system of taxation. In 1943, the top 25,000 income-earning households paid 68.4% of their income in taxes; in 2004 they paid a paltry 21.9%. Factoring in government policies that have steadily eroded the social safety net, it is clear why the richest 1% of Americans has accumulated six times more wealth since 1983 than the poorest 90%.
Making sure that America's ultra-wealthy pay their fair share of the tax burden would increase faith in the American goal of shared prosperity. It would also generate a considerable amount of revenue that could be used to meet the basic housing, health and education needs of ordinary Americans. Maybe we could even afford to keep our mines safe and fix our bridges.
Of course, many pro-market cheerleaders would have us believe that placing checks and balances on the financial activities of America's economic elite will eliminate incentives for wealth creation and lead to Soviet-style stagnation. However, several studies have shown that inequality itself can harm the economy's efficiency. Management guru Peter Drucker, for example, believed that no CEO-worker pay gap could be over 20-to-1 without damaging company morale and lowering productivity. According to a new report by the Institute for Policy Studies and United for a Fair Economy, that gap is now 364-to-1.
To truly turn around the alarming trend of extreme wealth concentration, it will be necessary to restore the trust and sense of shared responsibility that characterize any truly healthy society. And that's a goal that cannot be met as long as financial executives are raking in outrageous compensation while their customers are becoming homeless.
Jeremy Koulish was a researcher on "Executive Excess," the 14th annual report on executive compensation released August 29 by the Institute for Policy Studies in Washington, DC, and Boston-based United for a Fair Economy.