Taibbi’s right, everyone knows Wall Street’s run by a bunch of dictators who are doing more damage to democracy and capitalism than North Africa’s dictators. But jail the CEOs of Goldman, Citi, BofA or my old firm Morgan Stanley? Too late! Only a revolution will stop Wall Street’s self-destructive capitalism. Watching the people revolt against dictators like Mubarak and Gadhafi reminds us of the spirit that sparked the American Revolution in 1776.

But today we need a 1930s-style revolution. And look back at the S&L crisis two decades ago whan America had a backbone, indicted 3,800 executives and bankers. Today’s leaders have no backbone. Besides jail time won’t reform the darkness consuming Wall Street’s soul. We’re all asleep, in denial about the core moral crisis facing America, destroying us from within. Yes, we need a new revolution.

Jail time? We’ve heard that so many times before. Journalists have been beating that dead horse for three years. Jailing CEOs made sense in early 2009. But our naïve president missed that opportunity, instead surrounded himself with Wall Street insiders as Bush did with Blankfein’s predecessor. Trojan Horses manipulating a Congress filled with clueless Dems mismanaging tired Keynesian theories.

Taibbi got it right: Washington’s error was in protecting Wall Street’s billion-dollar crooks when they should have been prosecuting CEOs for criminal behavior in getting us into the 2008 mess. So today, the political statute-of-limitations has run. The “jail” solution is wishful thinking, like praying to the tooth fairy for a miracle. Time for action. Time for a revolution on Wall Street. Wake up America, listen:

“Our country is bankrupt. It’s not bankrupt in 30 years or five years,” warns economist Larry Kotlikoff, “it’s bankrupt today.”
Economist Peter Morici: “Capitalism is broken, America’s government is two bankrupt political parties bankrupting the country.”
David Stockman, Reagan’s budget director: “If there were such a thing as Chapter 11 for politicians” the “tax cuts would amount to a bankruptcy filing.”
BusinessWeek recently asked analyst Mary Meeker to run the numbers. How bad is it? America really is bankrupt, with a “net worth of a negative $44 trillion.” Yes, we’re bankrupt.

And it will get worse. Why? Because nothing can stop America’s self-destructive Wall Street bankers. They simply do not care that their “doomsday capitalism” is destroying Wall Street from within, and bankrupting America too.

Read the full column in MarketWatch detailing the 4 “ticking timebombs” that will trigger the “third meltdown” of the 21st century and bankrupt Wall Street.

That’s why ol’ Uncle Warren’s defense of the credit rating agencies is so unAmerican, lacking true leadership character. Here’s the diagnosis I made of his problems when he was defending Moodys, Goldman and the rest of the corrupt Wall Street banks earlier in my MarketWatch column: ”Buffett defends Goldman, joins Greed Conspiracy: Uncle Warren strums ukulele, in denial of Wall Street’s toxic business model.” A few key points: Ol’ Uncle Warren has a bad case of denial. Remember, not too long ago Buffett was calling derivatives “weapons of financial mass destruction.” And yet, there he was on stage at his Berkshire shareholders annual love-fest defending Wall Street’s most toxic companies, trapped in denial, defending the greedy culture that got America into its current mess:

• Praising Moody’s “business mode,” and by inference all rating agencies that rubberstamped Wall Street’s toxic debt, setting up the last meltdown …
• Defending Goldman Sachs bad behavior despite the fraud suit and a possible criminal indictment (while hiding his own conflicts-of-interest as a big investor in both Moody’s and Goldman) …
• Praising Goldman’s CEO Blankfein, Wall Street’s greediest fat-cat banker who paid himself $68 million of his stockholders profits last year …
• Defending Goldman with a bizarre argument that Goldman is no more guilty than the other Wall Street banks, a tacit approval of the bad behavior of all Wall Street banks in the Goldman Conspiracy …
• Worse, ol’ Uncle Warren also tried deflecting attention from Wall Street’s corrupt business model by blaming government regulators for the meltdown, another example of Uncle Warren’s blind denial, ignoring the fact that in the past year Wall Street spent over $400 million on lobbyists and campaign cash to make absolutely certain regulators, Congress and the Obama team all played along with Buffett’s songs that guarantee Wall Street controls Washington regulators.
• Ironically, all this comes from a man who once lectured Congress on “Moral Integrity: I want employees to ask themselves whether they are willing to have any contemplated act appear on the front page of their local paper the next day, read by their spouses, children, and friends … Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

Yes, Buffett’s in denial … just like his banker buddies … like his friends in Obama’s White House … so short Buffett, short Baby Berkshire, short Goldman, short Moody’s. Why? Because they’re all “shorting America” piling on debt that’s pushed our debt-to-GDP ratio to 92%, past the IMF’s 90% danger zone. (more) Sorry Uncle Warren, but your credibility is shot, maybe you should resign.

In spite of the disclosure requirements in the Sarbanes-Oxley law, executives are back to the pre-scandals business-as-usual games of manipulating earnings, analysts, accountants, regulatory agencies and the press. Worse, today’s CEOs and their executive compensation committees continue flaunting their excesses as the gap between the rich and the rest of America widens. Worse, in the wake of the subprime credit meltdown, as banks suffered huge losses and pocketed billions in taxpayer dollars, billions was passed as yearend bonuses, while incompetent executives at Citi, Bank of America, JPMorganChase and other “too-stupid-to-fail” banks were fired with billions in severance.

In Warren Buffett’s 2006 “Chairman’s Letter” to Berkshire-Hathaway he reminded shareholders of another axiom in his “Economics 101.” The most a stockholder can “earn between now and Judgment Day is what their businesses in the aggregate earn.” Business productivity is the key, not playing the stock market. Buffett took direct aim at one of his favorite targets, the raging out-of-control pay to the guys at the top. “Too often, executive compensation in the U.S. is ridiculously out of line with performance,” says Uncle Warren, “because the deck is stacked against investors when it comes to CEO pay. The upshot is that a mediocre-or-worse CEO—aided by his hand-picked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo—too often receives gobs of money from an ill-conceived compensation arrangement.

For example, CEO “Fred Futile” of “Stagnant, Inc” gets gobs of options from his buddies. The company goes stagnate. But good ol’ Fred cleans up no matter what, even when the investors lose bigtime. Seriously, even if he gets fired, says Buffett, Fred “can ‘earn’ more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these—let’s say enough to give him an option on 1% of the company—his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.”

Options distort the executive brain and shareholder values

Buffett’s goes into detail explaining CEO Fred’s con game: “Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 159% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.6 million by that time, and earnings per share would thereby increase to $25.90.”

So Fred is increasing his personal retirement nest egg at the expense of his company’s shareholder value: “Simply by withholding earnings from owners, Fred gets very rich, making a cool $159 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the ten-year period.” It gets worse.

The “iron law” in action—CEO’s win if their stockholders lose

Buffett continues: “Fred can also get a splendid result for himself by paying no dividends and deploying the earnings withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically—with Stagnant’s p/e ratio remaining unchanged at ten—Fred’s option will deliver him $68.9 million. Meanwhile, his shareholders will wonder what happened to the ‘alignment of interests’ that was supposed to occur when Fred was issued options.” They’re doing the exact opposite!

“A ‘normal’ dividend policy, of course—one-third of earnings paid out, for example—produces less extreme results but still can provide lush rewards for managers who achieve nothing. CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options,” says Buffett. “I’ve never, however, seen this manager-owner conflict referenced in proxy materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them capital that is free.”

Buffett warns: “It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But—surprise, surprise—options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation ‘experts,’ who are nevertheless encyclopedic about every management-friendly plan that exists.”

Amazing secrets of executive compensation magic

Whether it’s Lay and Skilling at Enron, or Fred Futile, CEO of Stagnant, and his friends, Ratchet, Ratchet and Bingo … or whether shareholders think they’re being protected by the SEC and Sarbanes-Oxley, and Wall Street’s bailed-out banks … none of that matters, forget it. Why? Because if it’s not options, it’ll be something else—Corporate America’s CEOs have made an art of creating huge compensation packages for themselves. They also know how to hide those $100 million-plus compensation packages we hear about in a Forbes “Special Report on CEO Compensation.”

As Forbes put it: “The key to hiding pay: Use as many words and as few numbers as possible.” They hide their golden gooses in six main ways: deferred compensation, perks, deferred options valuations, pensions and retirement benefits, merger agreements, dividends on restricted stocks, and other clever side documents that are extremely difficult to uncover, piece together and evaluate, thanks to lots of lawyers, accountants … and friends they pay off in Congress and the SEC.

As a result, USAToday now says that “during the past two decades, CEO pay has blasted off from the terrestrial world in which most workers toil to interplanetary levels where few salaried workers could ever hope to go.” The gap between CEO and workers was 40:1 in 1985 and grew to 600:1 in 2005. Now you know why guys like Uncle Warren gets hot under the collar when he tells his own shareholders stories like the one about Stagnant’s CEO, Fred Futile, who even if he gets fired, “can ‘earn’ more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets” … and why it will keep getting worse … and why, sadly, there’s virtually nothing the average Main Street investor can do about this masticizing cancer, nothing.

FirstPubDate: Mar’06