The Icahn Report
Corporate Waste Brings this Nation Closer to the Brink
Posted: 19 Sep 2008 12:52 PM CDT
Few things bother me more than the titanic government debt load this country carries from years of reckless government borrowing and spending. We really have no ability to repay this debt, other than by continually issuing new debt to pay the interest on the old debt.
The Peter G. Peterson Foundation calculates that we as a country have racked up a staggering $53 trillion in government obligations. That’s $455,000 per household and growing at the rate of $2 trillion to $3 trillion a year "on autopilot," the respected think tank says.
Just this week, we added another $85 billion to these obligations with the bailout of insurance giant AIG. Add that to the $200 billion in potential obligations to Fannie Mae and Freddie Mac, the $29 billion to back up Bear Stearns toxic credits, and $300 billion for the Federal Housing Authority and a possible $25 billion to $50 billion in low-interest loans for Detroit’s Big-3 automakers and we’re talking nearly $700 billion on top of this.
The debt and obligations we carry as a nation, combined with our miniscule savings rate and monster trade deficit, is truly frightening.
But what is even worse is the sheer amount of waste in corporate America that impedes our ability to generate revenue needed to finance these obligations. Already many infrastructure projects across the nation are suffering from declining tax revenue.
America’s corporations need to be run more efficiently or tax revenues will continue to fall far short and we will be even more in hoc to foreign lenders. Inefficiency and mismanagement on a colossal scale is causing our corporations to lose their economic hegemony in the global marketplace every day. For the past 30 years, I have warned in countless articles and interviews that we as a country are losing our economic preeminence and my predictions are unfortunately becoming a reality.
I am not claiming to be another Jeremiah or Biblical prophet here, because you don’t need divine inspiration to ascertain this. But it is obvious that our diminishing economic state reflects poor corporate management in America. We have all the resources to succeed, so there is no reason why we should lose on the economic battlefield. The recent debacles on Wall Street only further erodes our economic clout in the world.
EBITDAT
The situation has gotten so egregious that we half-jokingly use a measure called EBITDAT when evaluating companies, i.e. earnings before interest, taxation, depreciation, amortization and theft. In my view, this theft is a measure of how much senior executives and boards of directors blithely take out of companies in lavish salaries, perks and benefits, even though they may be running their companies into the ground.
I have observed first-hand the sheer amount of waste and inefficiency at a few companies that I have taken over.
For instance, when I took over a rail freight car company called ACF during the 1980s, they had 12 floors in a Manhattan office building which was filled with workers. I couldn’t figure out what they did. I really tried to find out what these people did and even went so far as to pay $500,000 to a consultant to study the issue and get back to me. After weeks of research, even the consultant couldn’t figure it out. So I shut down the division and it had no discernable impact on the performance of the company, which I own to this day.
This experience, in my view, is emblematic of the extent of waste in corporate America. There are few companies that you can’t come in and cut 30 percent of operating costs and no one would know the difference.
I don’t fault salaries and perks for executives that perform – they make money for all shareholders. It’s the ones that are paid for failure that really make me mad.
Why, for instance, should Daniel Mudd, the outgoing CEO of Fannie Mae, be eligible for an exit package reportedly worth some $9.2 million after he presided over one of the worst financial debacles in American history, and one that could possibly cost taxpayers hundreds of billions of dollars?
The regulators who oversee Fannie Mae now say Mudd won’t be getting that exit package, but he still soaked up a rich salary in previous years. Last year, when Fannie was jumping heedlessly into risky Alt-A and subprime mortgages that caused its demise, Mudd earned $11.6 million.
This week we find out that Robert Willumstad, the CEO of collapsing insurance giant AIG, is eligible for an exit package worth over $8 million, according to an estimate quoted in New York Times.
This comes as AIG is brought to its knees by vast overexposure to credit default swaps to the tune of some $440 billion, virtually requiring the Feds to pony up a staggering $85 billion in loan guarantees in return for warrants for nearly 80 percent of its stock.
Will AIG ever repay this loan? Will taxpayers ever get a return on this investment? Given the 46 percent fall in AIG stock after the deal was announced, the markets are skeptical about any AIG rebound, at least in the near-term.
Examples of egregious pay-for-failure abound in corporate America these days as though management is playing a game called "loser-take-all," only the shareholders are the real losers and are often left with nothing.
Stan O'Neal recently left Merrill Lynch as CEO with a pay package of $160 million, while Charles Prince left Citigroup with a $40 million deal. The boards of these companies should have taken every legal means not to pay these egregious golden parachutes. At companies I have been involved with, including Blockbuster, I was able to significantly reduce this kind of egregious payment, even though prior boards has forged them.
Other boards must do the same and reverse this destructive trend.
CREDIT EXCESS
The collapse of Fannie, Freddie, Lehman, AIG, Merrill and IndyMac and over a dozen regional banks is emblematic of the era of credit excess on the part of banks and abdication of government oversight in lending standards.
What we’ve really seen over the last three or four years is greed gone wild and now we’re paying the price for it in a monster hangover.
The fact is, we could end up in a major recession or even a depression with all the reckless lending that banks have done over the last few years, thanks to low interest rates, overabundant liquidity, lax lending standards and the wholesale offloading of risk to who knows where.
Obviously, a major business downturn will have a huge impact on government tax revenues, so our national debt could balloon even more in the next few years. Over 80 percent of government spending is non-discretionary and tied up for pension obligations, Social Security, Medicare, etc. So there is really very little spending that can be cut from the budget.
And with the "baby boomers" starting to retire, these costs are just going to keep inexorably rising.
I have read about many financial crises, from the Holland tulip bulb crash to the Mississippi bubble to 1929 and I think John Galbraith he summed it up best.
"All crises have involved debt, which in some fashion or another becomes dangerously out of scale to the underlying means of payment," said Galbraith.
The engine of our economy is business, a vast portion of which is conducted at public companies. If we have any hope of balancing our budget and paying our obligations, the revenue will have to come from taxes on business earnings, wages and capital gains made by investors - all of which is contingent on the success of business.
We simply cannot afford to allow our businesses to be run by hobbyists who parade around with the trappings of success like country club memberships, fancy limos, corporate jets, 50-yard line seats, skyboxes, golf outings, fishing trips, etc, all at shareholder expense, and pretend that they do a job that they abjectly fail to achieve.
The evidence that board members and managers are failing is screaming at us from the front pages of every newspaper and the talking heads on every television show.
This must change - and change fast.
