22 February 2009

Money, Money, Money

15 years ago, when I was a postdoc in the US, I read an article in the New York Times Magazine about the earnings of chief executives. As I remember it was entitled "What they earn and why they deserve it". I found it outrageous that they could seriously say that earnings of many millions a year would be "deserved", because of good performance of the company at the stock markets and so on.

Now, the New York Times has an article about reclaiming some of the money that executives of failed banks have received over the past years. Apparently they have come to the conclusion that these guys really did not "deserve" all that money. This is a step forward, but I still wait for someone to argue that excessive pay should not be allowed even if companies make good profits. The point is that such salaries favor a wrong mentality. Take this citation from the above mentioned article:
“This is really in our view a giant fraudulent conveyance, where money was paid out to executives at firms that were fatally undercapitalized,” said Daniel Pedrotty, director of the A.F.L.-C.I.O. office of investment. “We are arguing for a recovery of money that was used by people who treated these companies as a giant A.T.M. machine.”

So what can we do to change the thinking of executives that they can use their companies as giant A.T.M. machines? I have been arguing that a political approach could be to charge excessive taxes on excessive earnings. Would be quite simple if there were no "tax oases", i.e. countries that invite rich people to hide their money from taxes.

Unfortunately, one of the countries that happily accept the money that should be paid to other states is my homecountry Switzerland. The Swiss idea (and law) that "tax evasion" is not a crime, only "tax fraud", coupled with the bank secret, opens the door for such behaviour. And my favorite Swiss bank UBS has championed in it. The US has now turned up the heat on UBS and they agreed to hand over "secret" data on some clients whom they helped to evade US taxes. Furthermore, "the bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities."

Obviously, this breach of the Swiss' sacred bank secret instilled a heated debate in Switzerland. Most blame the US, although it now transpires that the top executives of UBS knew very well that they engaged in a risky and illegal business. What motivated them to do this? Did they just aim to increase the shareholder value of their bank, or could it be that they calculated how much their own personal share would be diminished if they stopped the raid on the US?

So, what's the bottom line? The leaders of UBS not only invested heavily in "toxic" US loans, which cost them many tens of billions, they also engaged in criminal activities to cheat the US government. The fine of $780 million is peanuts, much less than what they still pay out as bonuses to their employees. And the losses are covered by the Swiss government, to avoid a crash of this crucial company. Will they get away with that?

The irony is that these bankers happily accept to be helped with taxmoney, while they help rich people (like themselves) to avoid paying taxes wherever possible. Not only do they think they deserve the millions they earn, they also blame the state for claiming something back via taxes. Even as they themselves are saved by taxmoney, they don't appreciate the value of taxes.

Here is what I would do if I were in charge in Switzerland:
- nationalize UBS
- fire all top executives (they should be happy not to go to jail)
- claim back bonuses of the past 5 years (at least)
- abolish the bank secret and abusive tax laws
- introduce a 99% tax on all income above say 0.5 million Francs
- start the Swiss financial sector all over from scratch