Robert B. Reich, the former U.S. Labor Secretary under President Bill Clinton, a bestselling author and Professor Emeritus at UC Berkeley, penned an essay in May on why billionaires should not exist. Reich declares that there are only five ways someone can become a billionaire. (Reich narrates his essay in the video below, complete with cool graphics.)
Reich lists the following five methods of becoming a billionaire: (1) exploit a monopoly; (2) exploit inside information; (3) buy off politicians; (4) defraud investors; (5) get money from rich relatives.
You are likely thinking that there is nothing wrong with inheriting wealth from a rich relative. But if the money is inherited from a billionaire relative, it means that he or she likely got that wealth through one of the first four methods. Thus, dirty money is simply moving from generation to generation. That’s our thought; Reich has other thoughts on the matter involving the wealthy using tax loopholes “lobbied for by the wealthy.”
Another way to think about that is the reality that the old Mellon bank wealth, a chunk of which was handed down to Tim Mellon, enabled him to write a check for $50 million in May to a Super PAC supporting Donald Trump for President. That check came on top of tens of millions more that Mellon had already contributed to the same Super PAC in this election cycle. And, it was billionaires who pushed for and won the Citizens United decision in 2010 at the corrupted U.S. Supreme Court that made that $50 million political donation possible from one man.
Super PACs are also a key source of the hate and divisiveness that has engulfed the United States since the ironically-named Citizens United decision was handed down in 2010 because these Super PACs strategically run hateful attack ads against the opponents of the candidate they wish to install in public office.
But what we really want to focus on is how the repeal of the Glass-Steagall Act in 1999 by a fat cat on Wall Street, together with sycophants in President Bill Clinton’s administration, and cheerleading from the New York Times’ Editorial Board, has created a whole new method of becoming a billionaire without any risk of jail time, while undermining the safety and soundness of the U.S. financial system. We’re talking about obscene stock option compensation at the megabanks on Wall Street.
The repeal of the 1933 Glass-Steagall Act in 1999 allowed the trading casinos on Wall Street to merge with deposit-taking commercial banks – a practice which had been banned for 66 years because it was responsible for the 1929 stock market crash, thousands of insolvent banks, and ensuing Great Depression.
Just nine years after the repeal of the Glass-Steagall Act, Wall Street collapsed in the worst crisis since the Great Depression, taking the U.S. economy and housing market along for the ride.
The chief architect of the repeal of Glass-Steagall, Sandy Weill, was still listed as a billionaire by Forbes as of three years ago. This is how he became a billionaire:
Despite it being illegal at the time, in 1998 Weill combined his Travelers Group with Citicorp, the parent of the federally-insured commercial bank, Citibank. Travelers Group consisted of a large insurance company, an investment bank (Salomon Brothers) and a retail brokerage firm, Smith Barney. It would become the first of the megabanks (“universal banks”) on Wall Street.
The New York Times’ Editorial Board heralded the illegal and dangerous combination with this on April 8, 1998:
“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”
The Bill Clinton administration repealed the Glass-Steagall Act the following year and handed Weill a pen from signing the repeal legislation into law.
Weill became the surviving Chairman and CEO of Citigroup after he eventually pushed Reed out. Weill amassed a fortune from the bank through a technique that compensation expert Graef “Bud” Crystal called the Count Dracula stock option plan. You couldn’t kill it; not even with a silver bullet. Nor could you prosecute it, because Citi’s Board of Directors gullibly signed off on it.
The plan worked as follows: every time Weill exercised one set of stock options, he got a reload of approximately the same amount of options, regardless of how many frauds the bank had been charged with during that year.
Crystal detailed in an article for Bloomberg News that between 1988 and 2002, Weill “received 96 different option grants” on an aggregate of $3 billion of stock. Crystal says “It’s a wonder that Weill had time to run the business, what with all his option grants and exercises. In the years 1996, 1997, 1998 and 2000, Weill exercised, and then received new option grants, a total of, respectively, 14, 20, 13 and 19 times.”
By the time Weill stepped down as CEO in 2003, he had received over $1 billion in compensation, the majority of it coming from his reloading stock options. (Weill remained as Chairman of Citigroup until 2006.) One day after stepping down as CEO, Citigroup’s Board of Directors permitted Weill to sell back to the corporation 5.6 million shares of his stock for $264 million. This eliminated Weill’s risk that his big share sale would drive down his own share prices as he was selling. The Board negotiated the price at $47.14 for each of Weill’s shares.
Three years after Weill stepped down as Chairman, Citigroup’s stock was trading at 99 cents as the bank was being propped up with what would become $2.5 trillion in secret revolving loans from the Federal Reserve, according to an audit released in 2011 by the Government Accountability Office.
To window dress the share price of Citigroup for beleaguered shareholders after the financial crisis, the bank did a 1-for-10 reverse stock split on May 9, 2011. (For each 100 shares of stock, the shareholder was left with just 10 shares.)
While Weill has lived the fat cat life with mansions on both coasts, Citigroup’s long-term shareholders have been on a dismal journey as has the U.S. banking system. (See Former New York Fed Pres Bill Dudley Calls This the First Banking Crisis Since 2008; Charts Show It’s the Third.)
Jamie Dimon, who had been Weill’s first lieutenant at Citigroup, is the Chairman and CEO of the largest megabank in the U.S. – JPMorgan Chase. He has become a billionaire on his bank’s stock option compensation as well.
And while other CEOs at the megabanks may not make it to billionaire status, they are becoming obscenely rich despite their banks needing repeated bailouts from the Fed.
As Louis Brandeis said: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”