Corporate Waste Brings this Nation Closer to the Brink

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.

Comments

[Steven R. Haffner]

Aside from TWA, I have agreed with you right down the line. I certainly agree with everything said in this article. Immediate question is which of the presidential candidates and political parties is going to pass legislation creating meaningful shareholder democracy in this country? My bet is on Obama and the Democrats, if for no other reason than the devil we've known has killed us. Of course, laws creating greater executive accountability and greater shareholder democracy will likely limit your opportunities! Since you sincerely appear to believe the interests of this nation are more important than your own opportunities for profit, I applaud you here.

[RyanH]

What would you have me/us do?

[Charles]

Mr. Icahn,

I can't agree more.

I've just quit a job at a Fortune 500 company because I was working one or two weeks a month and doing nothing for the rest of the month. I was feeling I was stealing from shareholders and, of course, hurting my own career. I reported this fact, that I was doing nothing, to my supervisor and my supervisor's boss 5 times and they did nothing.

They just wanted to have a 'cushion' in case they were forced to cut jobs. Unbelievable!

Even worse, I changed companies and now I'm working for an even larger Fortune 500 company, leader in its industry. Guess ... same thing.

My takeaway is that leaders at many industries like to have many people reporting to them just to justify their big salaries and have their backs covered in case they need to actually cut. They don't have self-confidence to run the companies just with the resources that are needed. Why have resources 'just in case'?

[Moushumi Kabir]

You couldn't have said it better. I watch in distress the "expenses" executives claim on a daily basis. The pay packages are so outrageous, I'm shocked they are still in practice. Without cutting back on this waste, stepping down from top positions only become attractive, regardless of company earnings. Just pure incompetency at its worst in corporate America.

Thanks.

[Ron Mwangaguhunga]

What did you think about Senator Biden's appeal to patriotism as a reason to pay higher taxes?

[John]

This reflects badly on the bedrock conservative philosophy to keep government out of the free market. Clearly, this shows the finance industry needs strict oversight. Otherwise it just thumbs its nose at taxpayers knowing that government has to bail it out!

[Jack Daw]

Thanks for calling foul on the Wall Street crooks. Goldman is glad they have Goldman alum's in the Fed to save them.

[Jason B]

"...went so far as to pay $500,000 to a consultant to study the issue..."

Though consultants are typically prescribed during periods of cost savings, are they really the best mechanism for eliminating inefficiencies? From my perspective, many consultants are oddly double-tasked – highly "paid" to "save". Wouldn’t corporations be better served by some internal mechanism that evaluates the efficiency of the business – or can we not trust ourselves to do this?

[sidney]

AMEN

[Kevin Pilarski]

Mr. Icahn,

I hope the American people wake up and realize that they are being duped, either through higher taxes or inflation. I hope people finally get outraged enough to elect representatives that are not also in bed with the same corrupt corporate executives the helped us get into this mess. Risk must be accountable, as excessive risk taking is no different then holding up the taxpayer by gunpoint.

Kevin Pilarski

[alec brown]

Dear Carl
You are absolutely right, but how do we stop these payouts when the people at the top have all the control? I am glad that I live in Canada where we have no subprime mortgages even though we have companies that invest in them. It seems funny that people have to be responsible while governments and big business can just run around being irrresponsible. Ridiculous

[Ralph E Wright]

I was very impressed with your comments of how the board rooms are where the problems are. I am working with a company called Psynance.com which is a corporate consultant firm. Their philosophy is the same as yours, we need to put those CEO's on the block and let them that we are watching them.

[Bruce Allen]

I share your sense of outrage over the business-as-usual attitude that we are bombarded with every day. Corporate waste, corporate incompetence, Congress in a perpetual state of dysfunction, the list goes on and on. But what is really sad is that we the people sit back and take it. I see no end in sight until we the people demand change. We must demand intelligence and ethical behavior from our political and corporate leaders.

And while we are at it, we the people should brush up on our rights and responsibilities. Far to often, we sit back and let someone else take care of our business. The Wall Street snafu at the beginning of this decade should have been the wake up call for us to demand complete control over our financial future. Did we learn our lesson? Sadly, no. Come on America, wake up. Time is running out. This country cannot survive in a continual state of dysfuntion.

[Caroline Benser]

Mr. Icahn, thanks for appearing on the CNBC program this afternoon, and for stating facts that appear so much like common sense to most of us. It was heartening to see that despite the dire seriousness of the topics at hand, there were moments of humor. Let us hold our breath that the heads in charge here will bring us over this immediate hurdle, and that common sense will slowly return to the many. C. B.

[Bev]

I just watched you on CNBC. I do agree with you that we needed to stop a run on money markets. We needed to calm the hysteria. But was such a broad based financial bailout behind closed doors necessary? I keep thinking "no taxation without representation" and as an American taxpayer I feel wronged. I did not make a fortune lending and spending and I don't want to pay for it. I do believe the people who caused this should be held accountable, from the buyers of homes they could not afford to the last buyers of bad mortage securities.

[Denny Wadlington]

As a protest to this problem, I simply vote "no" on any ballot I receive from any corporation that I own. Maybe if the board gets enough no votes they will change the way they do business. Automatic yes votes should be eliminated.

[Brian Janak]

Thank you, thank you, thank you!
I put my reputation on the line everyday, and move numerous "deals" forward through difficult obstacles and uncontrollable factors. I line up probability and do not rely on hope brokerage because as a commercial investment real estate broker, I don't get paid until the deal funds.
Mr. Icahn, your diagnosis is right on, but how can we get rid of lobbyists and ineffective leaders in industry to make a change that is based on performance, say commission only? Institutional companies are too fat, and the internal greed of these large companies with no oversight and no accountability, must be regulated more than wall street.
Brian

[Norm Ezzie]

With what I know about these Global-Dynastic Banking Families,and the "new big rich"- crunching a few nasty fiancial-institutions is simply the application of "changing the way business was,and now will be"- thru globalization, did America just now become a "3rd world type superpower"? Mmmmmm? Or is it that Money Trust making their words heard,in a matter of a few days????Mmmmmm? What lies ahead for all of us is one thing for certain....a lower standard of living!These plutocrats that most people call politicans know exactly what they've created,and its been accomplish so very easily-with that fiat currency! Monoply-Finance-Capitalization comes in all kinds of packages,and is sold to us,by some of the most diabolical people on the planet! The rest of what we say can be seen at:www.storminnorm.com Norm Ezzie- Cleveland,Ohio

[Bev]

Hello Mr. Icahn,

After watching you on CNBC and enjoying the show, I also want to know what you would have us do?

[William Heppe]

I'm a retired technician. kind of a newbie in the financial world and I now make my living from my investments. This week, because of my outlook toward the distant and more-healthy economy, did not entirely shake me up. Besides! Today we're only thirty points (DJI) off last Friday.

The AIG-thing bothers me though because, in the last two-and-a-half years, I've learned NOT to put all my eggs in one basket. The point I make:

AIG is too big; if it were a smaller company, in the spirit of "anti-trust," Not much attention would be paid to it's failure. It's only because these companies hold our economy in trust that we feel compelled to revive them.

Is that what anti-trust laws were supposed to accomplish? More competition(capitalism) and less impact on the national economy?

Break 'em up!

[Brett S]

As an outsider, and a great USA supporter, it's very distressing to see what is happening to this magnificent country. I sincerely hope the Republicans get roasted in November, they deserve nothing less. The world holds it's collective breath!

[arsenal11730]

Carl,

I Sincerely Appreciate, Your Straight Forward and Honest Assessment of Todays Corporate Boardroom Calamities. Thank You for Engaging Washington to Create Change.

God Bless
Cheers

[Hazman]

Mr. Icahn,

Thank you for the wonderful write-up and your appearance in CNBC (this early morning where I am from).

We know fundamentally that corporate greed is the main reason for all these woes. Some greed is healthy, I guess. What we also need is INTEGRITY in conducting businesses. If those running the financial corporations had any sense of INTEGRITY we would not see anyone lending to those who cannot afford it in the first place, for example. What were they thinking.

[TJ]

I too am so sick of corporate inefficiencies in the form of company waste AND executives' lavish lifestyles and egregious spending. The Tyco exec whose Italian toga party was one of the most outrageous uses of company funds; is seriously PATHETIC. That loser should have had more fun in college (where that crap belongs) rather than throwing a party with dancing toga-wearing sprites using funds that should have gone to shareholders!!

GO CARL ICAHN! I hope you win the fight against the whole spectrum of corporate BS and I'll join you every step of the way as will SO MANY more, I am sure of it!

[Helen Mashburn]

There is not one company that has been in the
news over the housing crisis or this week that
have not spelled their financial problems g-r-e-e-d.