On 15th September 2008, Lehman Brothers filed for bankruptcy. It was the largest corporate collapse in history. It led to a spiralling collapse of sharemarkets and credit funding around the world, greatly exacerbating the Global Financial Crisis.
Lehman Brothers was heavily geared - it borrowed 31 times its capital asset base. Just a small downturn wiped out its book value.
When the business was liquidated, the real estate and data centres sold for $1.29 billion. The core business for $1.35 billion.
Hundreds of billions of dollars in Lehman Brothers debts were never satisfied.
There are many lessons from this corporate collapse, but the obscene part was the payout to executives. In 2007 alone the company paid $5.7 billion to senior executives in bonus payments. In 2008, in the leadup to the bankruptcy and even after it, the company and its executors were forced contractually to pay a further $2.5 billion to executives in bonus payments.
In other words, as Lehman Brothers was heading to its cosmic disintegration, executives were paid $8.2 billion in handouts for wrecking the company and causing untold financial misery around the world.
A century ago, the great capitalist barons made huge fortunes, but the money they risked was their own. Now, executives receive large bonuses risking other people's money - and they face no down side. They continue to get paid megabucks even when they act foolishly and destroy their company.
Is such a system rational?
Whenever the issue of excessive handouts to executives is raised, they answer that this is dictated by the market, and we have to remain competitive.
What complete bunkum.
Large companies have shareholdings in each other, and the executives of one company will sit on the board of another to protect their shareholding. When the executive salary issue comes up, they have every interest in keeping payments high - the favour will be returned when their own payments are considered. Far from market competition, it is market collusion.
Small shareholders in practice get very little say in executive payments - they are set by executives themselves.
Such a situation is capable of regulation, and should be. No performance bonus should be paid unless there is a corresponding performance penalty if things go wrong. Bonuses linked to short term gains should be outlawed, as often it is only in the longer term that the real financial position can emerge. The level of executive salaries can be controlled in a variety of ways - such as requiring a fixed relationship between the salary of the chief executive and the pay of the lowest-remunerated person in the corporation.
One thing is clear, the present system is no good for business - let alone the people whose lives are ruined by this excess.
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