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Appalling Leadership Failures

What Red Ink? Wall Street Paid Hefty Bonuses Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year. That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller. While the payouts paled next to the riches of recent years, Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high. Some bankers took home millions last year even as their employers lost billions. The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher. The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely. Bonus Payout Graphic 

Obama Calls Wall Street Bonuses ‘Shameful’ President Obama branded Wall Street bankers “shameful” on Thursday for giving themselves nearly $20 billion in bonuses as the economy was deteriorating and the government was spending billions to bail out some of the nation’s most prominent financial institutions. “There will be time for them to make profits, and there will be time for them to get bonuses,” Mr. Obama said during an appearance in the Oval Office with Treasury Secretary Timothy F. Geithner. “Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.” It was a pointed — if calculated — flash of anger from the president, who frequently railed against excesses in executive compensation on the campaign trail. He struck his populist tone as he confronted the possibility of having to ask Congress for additional large sums of money, beyond the $700 billion already authorized, to prop up the financial system, even as he pushes Congress to move quickly on a separate economic stimulus package that could cost taxpayers as much as $900 billion. This week alone, American companies reported as many as 65,000 job cuts, and public anger is rising over reports of profligate spending by banks and investment firms that are receiving help from the $700 billion bailout fund. About half of that money is still available, but the new administration has yet to announce how it will use it, and many analysts think it will take far more to stabilize the banking system. Should Mr. Obama have to go to Congress to seek more money for the bailout fund to avert the failure of more banks, he would most likely encounter opposition within both parties and demands for tighter restrictions on pay for executives of institutions that receive government assistance. Mr. Geithner has already signaled a willingness to impose stricter compensation limits as part of a revamped approach to dealing with the banking crisis, but with his strong words on Thursday, Mr. Obama seemed intent on reassuring Congress and the public that he would step up the pressure on bankers before granting them additional assistance. Mr. Obama was reacting to a report by the New York State comptroller that found financial executives had received an estimated $18.4 billion in bonuses for 2008, less than for the previous several years but the same level of bonuses as they received in 2004, when times were flush. “That is the height of irresponsibility,” Mr. Obama said. “It is shameful. And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”

• Getting Theirs Cuts Both Ways on Wall Street
• It’s Theirs and They’re Not Apologizing

Talking Business: It’s Not the Bonus Money. It’s the Principle. When you get right down to it, the purchase of a new plane or an office renovation is pretty meaningless for companies as large as Citigroup or Bank of America. It’s not unheard of for executives to spend $1 million or more on remodeling when they get the corner office. It’s pocket change. And companies can usually make a halfway decent business case to justify a new airplane. (It goes longer distances than older planes, can take more executives to meetings, allows the top brass to be more efficient and productive, etc., etc.) The question of whether bailout money was used to pay for these perks — as alleged by The New York Post, which broke the Citi airplane story — is, at best, ambiguous. Indeed, breaking the airplane contract and sending the jet back to the manufacturer will probably cost the bank more than keeping the plane. None of that matters. You could make the same argument about the auto executives who flew on corporate jets when they came to Washington to ask Congress for help: surely, it was a better use of their time to fly rather than drive from Detroit, as they did the second time around, after being spanked for taking the jets. That didn’t matter either. What matters is the symbolism. At a time when the country is in such trouble — and executives are asking for bailouts — anything that smacks of plutocracy is going to arouse justifiable populist anger. “This has been building for 20 years,” said Richard C. Ferlauto, director of corporate governance for the American Federation of State, County and Municipal Employees. “Regular working people haven’t gotten ahead in the economy. They understand that tremendous wealth has been created, and they say, ‘Where’s mine?’ ” He continued: “These guys seem to be living in another universe. So the symbolism of the umbrella stand and the private jet is powerful.” The umbrella stand, of course, was a reference to the $15,000 umbrella stand that the former Tyco chief executive Dennis Kozlowski bought with company funds — and that is part of the reason he is now behind bars. But there is something else as well. Most people still don’t fully understand what, exactly, Wall Street did that caused so much trouble for the country and the financial system. I spoke this week to David M. Smick, author of a scathing book about Wall Street, “The World Is Curved: Hidden Dangers to the Global Economy.” In indignant tones, he talked to me about the sophisticated off-balance-sheet vehicles the banks used to hide risk and game the system, and the “mortgage-backed securities they were shoving out the door.” He concluded, “I find their behavior just appalling.”

Why the Merrill Bonuses Are a Watershed MomentIn the midst of the Vietnam War, an Air Force major told war correspondent Peter Arnett that it was necessary to destroy the town of Ben Tre in order to save it. The twisted logic came to encapsulate the insanity of the entire decade-long fiasco. We've now reached a Ben Tre moment in the financial crisis, thanks to Wall Street's fat-cat bonuses, especially those at Merrill Lynch. New York attorney general Andrew Cuomo is investigating why Merrill issued $3.6 billion in bonuses to executives last year - even though the firm lost nearly $28 billion and had to be taken over by Bank of America, with taxpayer assistance. And now the Wall Street Journal has identified some of the top recipients, including 11 executives who received more than $10 million each, in the same year that Merrill barely escaped a total flameout. But to the rest of us, it's absurd that anybody should earn a multimillion paycheck when their firm is flat-lining. "RBS and ABN Amro are both bankrupt, yet the banker who put that deal together walks off with $30 million," former Federal Reserve Chairman Paul Volcker said at a recent conference in New York. "There's something the matter with that system." It's obviously worse still when a firm paying billions in bonuses turns around and leans on middle-class taxpayers for assistance.

The Theory of the Case

Finally, outrage over huge bonuses Just a mere $18.4 billion in Wall Street bonuses, and suddenly the entire country is like Kansas in the 1890s, raising hell instead of corn, screaming for revenge on money power that has done us so wrong while rewarding itself so generously. The outburst of populist rage is particularly alarming when we consider how easily such sentiments were managed just a short while ago. Americans have known about mounting inequality and king-sized Wall Street bonuses for years. But we also had an entire genre of journalism dedicated to brushing the problem off. Now the populist shoe is on the other foot, though, and it's the liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn't. Maybe, in its rage for fairness, the public is on to something that the banking industry's remaining defenders need to acknowledge. It is merely this: Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe." At each stage of the disaster, Black said -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong." The need for new compensation rules is most urgent at failed banks. This is not merely because it would make for good PR but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks and even, according to Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continued, it is "essential to redesign and limit executive compensation when regulating failed or failing banks." Our leaders may not know it yet, but this showdown between rival populisms is, in fact, a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty? Let the conservatives' hosannas turn to sneers. The market god has failed. 

Animal Instincts: Main Street Seeks Revenge on Wall Street ... The outrage expressed by many so-called Main Street folks over the proposed Wall Street bailout is based on more than a sense of injustice. It's about revenge, a basic animal instinct shared by humans, chimpanzees and even blue-footed boobies. And Washington politicians would be wise to listen up and stick some get-back-at-'em clauses into the bailout bill if they hope to get the support of the average American, says one behavioral economist who studies these things. In phone calls made by constituents to politicians, as well as e-mails to news organizations and other media, the public has expressed a preference for a package that helps consumers and homeowners without assisting fat cats on Wall Street. In fact, a Pew Research Center survey conducted Sept. 27 through Sept. 29 found that nearly 70 percent of Americans say they feel angry about the government's plan, and half admit they are scared. President Bush and other leaders who support the bailout warn, however, that if financial institutions are not propped up quickly and significantly with public money, the average American will pay the price. Bring it on, many people seem to be saying. Dan Ariely would agree. "People are willing to lose money to get those people [on Wall Street] to suffer" because the corporate financial leaders have violated a social contract, says Ariely, a behavioral economist at Duke University. "We need to include revenge in the bill."  

Exemplars: Mulally at Ford and the USMC

Alan Mulally: The Outsider at Ford But the man who chose Mulally, Chairman William Clay Ford Jr., says his CEO's progress in shaking up a calcified culture has thus far kept Ford independent and away from the U.S. Treasury's loan window. Under Mulally, decision-making is more transparent, once-fractious divisions are working together, and cars of better quality are moving faster from design studio to showroom. John Casesa, whose Casesa Shapiro consulting firm advises the industry, is impressed, too. "The speed with which Mulally has transformed Ford into a more nimble and healthy operation has been one of the more impressive jobs I've seen," he says. "It probably would have been game over for Ford already but for the changes he has brought." No one understood the travails of running the automaker better than Henry Ford's great-grandson. The company was bureaucratic and hostile to new ideas. And below the C-suite, it hadn't yet sunk in that Ford was fighting for its life. The chairman also knew his company had a history of "organ rejection," or spurning outsiders. He had watched executives from outside arrive at Ford only to be isolated and even hazed. He resolved to give Mulally all the help and advice he needed. Mulally's biggest challenge, Ford said, would be breaking down silos, specifically the operating regions around the world -- Europe, Asia, South America, and Australia -- that were more interested in defending their turf than working together. It was a culture, Ford explained, where one's career had come to mean more than the company.

• Mulally: Ford's Most Important New Model
• How Mulally Will Tackle Ford's Troubles, An Interview with Bill Ford and Alan Mulally
• Ford's Shrinking Losses Play Up Mulally's Progress
•  Alan Mulally: Ford's Fixer, Commentary: Mulally Led Ford Seems Like A Good Risk For Taxpayers

A Tragedy of Errors, and an Accounting The jet crashed nose down in the University City neighborhood of San Diego, hitting two homes and damaging three. Four people, all members of a Korean immigrant family, were killed—36-year-old Youngmi Lee; her daughters, Grace, 15 months, and Rachel, 2 months, and her 60-year-old mother, Seokim Kim. Lee's husband, a grocer named Dong Yun Yoon, was at work. The day after he'd lost his family, he humbled and awed San Diego by publicly forgiving the pilot—"I know he did everything he could"—and speaking of his faith—"I know God is taking care of my family." His grace and generosity were staggering, but there was growing local anger at the military. Why was the disabled plane over land? The Marines launched an investigation—of themselves. This Wednesday the results were announced. They could not have been tougher, or more damning. The crash, said Maj. Gen. Randolph Alles, the assistant wing commander for the Third Marine Aircraft Wing, was "clearly avoidable," the result of "a chain of wrong decisions." Mechanics had known since July of a glitch in the jet's fuel-transfer system; the Hornet should have been removed from service and fixed, and was not. The young pilot failed to read the safety checklist. He relied on guidance from Marines at Miramar who did not have complete knowledge or understanding of his situation. He should have been ordered to land at North Island. He took an unusual approach to Miramar, taking a long left loop instead of a shorter turn to the right, which ate up time and fuel. Twelve Marines were disciplined; four senior officers, including the squadron commander, were removed from duty. Their military careers are, essentially, over. The pilot is grounded while a board reviews his future. This wasn't damage control, it was taking honest responsibility. And as such, in any modern American institution, it was stunning. The day after the report I heard from a young Naval aviator in predeployment training north of San Diego. He flies a Super Hornet, sister ship to the plane that went down. He said the Marine investigation "kept me up last night" because of how it contrasted with "the buck-passing we see" in the government and on Wall Street. He and his squadron were in range of San Diego television stations when they carried the report's conclusions live. He'd never seen "our entire wardroom crowded around a television" before. They watched "with bated breath." At the end they were impressed with the public nature of the criticism, and its candor: "There are still elements within the government that take personal responsibility seriously." He found himself wondering if the Marines had been "too hard on themselves." "But they are, after all, Marines."

Is 'Octomom' America's Future? A moment last Monday, just after noon, in Manhattan. It's slightly overcast, not cold, a good day for walking. I'm in the 90s on Fifth heading south, enjoying the broad avenue, the trees, the wide cobblestone walkway that rings Central Park. Suddenly I realize: Something's odd here. Something's strange. It's quiet. I can hear each car go by. The traffic's not an indistinct roar. The sidewalks aren't full, as they normally are. It's like a holiday, but it's not, it's the middle of a business day in February. I thought back to two weeks before when a friend and I zoomed down Park Avenue at evening rush hour in what should have been bumper-to-bumper traffic. This is New York five months into hard times. One senses it, for the first time: a shift in energy. Something new has taken hold, a new air of peace, perhaps, or tentativeness. The old hustle and bustle, the wild and daily assertion of dynamism, is calmed. A major reason people are blue about the future is not the stores, not the Treasury secretary, not everyone digging in. It is those things, but it's more than that, and deeper. It's Sully and Suleman, the pilot and "Octomom," the two great stories that are twinned with the era. Sully, the airline captain who saved 155 lives by landing that plane just right—level wings, nose up, tail down, plant that baby, get everyone out, get them counted, and then, at night, wonder what you could have done better. You know the reaction of the people of our country to Chesley B. Sullenberger III: They shake their heads, and tears come to their eyes. He is cool, modest, competent, tough in the good way. He's the only one who doesn't applaud Sully. He was just doing his job. This is why people are so moved: We're still making Sullys. We're still making those mythic Americans, those steely-eyed rocket men. Like Alan Shepard in the Mercury rocket: "Come on and light this candle." But Sully, 58, Air Force Academy '73, was shaped and formed by the old America, and educated in an ethos in which a certain style of manhood—of personhood—was held high. What we fear we're making more of these days is Nadya Suleman. The dizzy, selfish, self-dramatizing 33-year-old mother who had six small children and then a week ago eight more because, well, she always wanted a big family. "Suley" doubletalks with the best of them, she doubletalks with profound ease. She is like Blago without the charm. She had needs and took proactive steps to meet them, and those who don't approve are limited, which must be sad for them. She leaves anchorwomen slack-jawed: How do you rough up a woman who's still lactating? She seems aware of their predicament. CBS Sixty Minutes Interview

On Public Virtue Those who study the rise and fall of civilizations learn that no shortcoming has been as surely fatal to republics as a dearth of public virtue, the unwillingness of those who govern to place the value of their society above personal interest. Yet today we read outcries from conscientious congressmen disenchanted with the proceedings of their legislative body and totally disgusted with the logjamming effect of their peers' selfish and artful distancing of themselves from critical spending cutbacks, much-needed belt-tightening legislation without which the long-term existence of our Republic itself is endangered. Probably no character trait was so universally identified by our Founding Fathers as essential to the long-run success of the American experiment as selfless public virtue. In those days of decision, almost all of them were quick with pleas for its encouragement and institutionalism. For instance, John Adams, in a letter to his friend Mercy Warren, author and sister of revolutionary leader James Otis, wrote: "Public virtue cannot exist in a Nation without private, and public Virtue is the only Foundation of Republics. There must be a positive Passion for the public good, the public Interest, Honour, Power and Glory, established in the Minds of the People, or there can be no Republican Government, nor any real liberty." The connection between liberty and public obligation probably occurred naturally to those who founded the United States. Many of them were exceptionally well read in political history and theory. The founders' debates were salted with easy references to Locke, Hume, Machiavelli, and Montesquieu, as well as the ancients: Aristotle, Seneca, Marcus Aurelius, and that second-century Greek who was the great historian of the early Roman republic, Polybius. That Roman Republic and its ethos, particularly during its first three hundred years, were a national model for our founders' dreams.