Meanwhile, too many of these same corporations have failed to deliver for their shareholders. Citigroup, for example, has delivered the worst stock performance mong all large banks for the last decade but ranked among the highest in executive pay.

The real news here is new-found activism among institutional investors – especially the managers of pension funds and mutual funds. They’re the ones who fired the warning shot Tuesday.

Institutional investors are catching on to a truth they should have understood years ago: When executive pay goes through the roof, there’s less money left for everyone else who owns shares of the company.

For too long, most fund managers played the game passively and obediently. Some have been too cozy with top corporate management, forgetting their fiduciary duty to their own investors. How else do you explain the abject failure of fund managers to police Wall Street as it careened toward the abyss in 2008? Or to adequately oversee executives, such as the Enron criminals, who were looting their companies in the years before 2002?

The new Dodd-Frank law, much of which is being eviscerated by Wall Street’s lawyers and lobbyists, at least requires that public companies give shareholders a say on pay. As a practical matter, this gives institutional investors the chance to speak clearly and openly about the scandal of unbridled executive compensation.

Two key questions for the future: Will institutional investors keep the pressure on? And will CEOs and boards of directors get the message?

To add to this embarrassment of riches, the consumer group Citizens for Tax Justice reports that more than two dozen major corporations  — including GE, Boeing, Mattel and Verizon — paid no federal taxes between 2008 and 2011. They got a corporate tax break that was broadly supported by Republicans and Democrats alike.

Corporate taxes today are at a 40-year-low — even as the executive suites at big corporations have become throne rooms where the crown jewels wind up in the personal vault of the CEO.

Then look at this report in The New York Times: Last year, among the 100 best-paid CEOs, the median income was more than 14 million, compared with the average annual American salary of $45,230. Combined, this happy hundred executives pulled down more than two billion dollars.

What’s more, according to the Times “… these CEO’s might seem like pikers. Top hedge fund managers collectively earned $14.4 billion last year.”  No wonder some of them are fighting to kill a provision in the recent Dodd-Frank reform law that would require disclosing the ratio of CEO pay to the median pay of their employees. One never wishes to upset the help, you know. It can lead to unrest.

That’s Wall Street — the metaphorical bestiary of the financial universe.  But there’s nothing metaphorical about the earnings of hedge fund tigers, private equity lions, and the top dogs at those big banks that were bailed out by tax dollars after they helped chase our economy off a cliff.

So what do these big moneyed nabobs have to complain about? Why are they whining about reform? And why are they funneling cash to super PACs aimed at bringing down Barack Obama, who many of them supported four years ago?

Because, writes Alec MacGillis in The New Republic — the president wants to raise their taxes. That’s right — while ordinary Americans are taxed at a top rate of 35 percent on their income, Congress allows hedge fund and private equity tycoons to pay only pay 15 percent of their compensation. The president wants them to pay more; still at a rate below what you might pay, and for that he’s being accused of – hold onto your combat helmets –  “class warfare.”  One Wall Street Midas, once an Obama fan, now his foe, told MacGillis that by making the rich a primary target, Obama is “[expletive deleted] on people who are successful.”

And can you believe this? Two years ago, when President Obama first tried to close that gaping loophole in our tax code, Stephen Schwarzman, who runs the Blackstone Group, the world’s largest private equity fund, compared the President’s action to Hitler’s invasion of Poland.

That’s the same Stephen Schwarzman whose agents in 2006 launched a predatory raid on a travel company in Colorado. His fund bought it, laid off 841 employees, and recouped its entire investment in just seven months – one of the quickest returns on capital ever for such a deal.

To celebrate his 60th birthday Mr. Schwarzman rented the Park Avenue Armory here in New York at a cost of $3 million, including a gospel choir led by Patti LaBelle that serenaded him with “He’s Got the Whole World in His Hands.” Does he ever — his net worth is estimated at nearly $5 billion. Last year alone Schwarzman took home over $213 million in pay and dividends, a third more than 2010. Now he’s fundraising for Mitt Romney, who, like him, made his bundle on leveraged buyouts that left many American workers up the creek.

To add insult to injury, average taxpayers even help subsidize the private jet travel of the rich. On the Times’ DealBook blog, mergers and acquisitions expert Steven Davidoff writes, “If an outside security consultant determines that executives need a private jet and other services for their safety, the Internal Revenue Service cuts corporate chieftains a break. In such cases, the chief executive will pay a reduced tax bill or sometimes no tax at all.”

Are the CEOs really in danger? No, says Davidoff, “It’s a common corporate tax trick.”

Talk about your friendly skies. No wonder the people with money and influence don’t feel connected to the rest of the population. It’s as if they live in a foreign country at the top of the world, like their own private Switzerland, at heights so rarefied they can’t imagine life down below.

When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years.

But the Federal Reserve itself should be insulated from those kinds of pressures.

They should be, except in the person of Alan Greenspan. He’s just this gnarly mass of contradictions. He’s an acolyte of Ayn Rand – believes that no intervention in free markets is the right approach – and yet he proceeded to spend his entire career, from 1987 through 2005, with his hands on the levers of Federal Reserve policy. He manipulated interest rates and money supply in order to win the love of traders. In 2001 he took rates down to unprecedented levels – below 2 percent – and kept them there for three years. Rates were at 1 percent for a full year! That had simply never occurred before in history. If you look at the late 1950s and early 1960s, rates would dip below 2 percent, but only for weeks at a time. In the “Who is to blame?” game Alan Greenspan is number one with the bullet, he’s top of the list. You can’t blame everything on him, but he’s the one who let all the gas fumes into the enclosed warehouse, knowing that a bunch of smokers were coming in to have a cigarette. Taking rates down to irresponsibly low rates is what set the stage for everything that took place over the next decade.

Are you saying that just as Ben Bernanke admitted the Federal Reserve had caused the first Great Depression, this crisis can also be blamed on our central bank?

The world isn’t black and white. We can’t just say, “The butler did it.” There were many causes, lots of poor judgements… The Federal Reserve was a significant element. But if you want to do it chronologically, you may want to go back further into the history. The bailout of Chrysler in 1980 set the stage. The rescue of Long Term Capital Management (LTCM) in 1998 encouraged a lot of moral hazard. Then there was all the radical deregulation, the undoing of some of the post-Depression rules that had operated so successfully for 75 years to prevent a major meltdown. The undoing of Glass-Steagall didn’t cause the crisis, but it made it much worse. Then there was the Commodity Futures Monetization Act (CFMA) of 2000, which completely exempted derivatives from any oversight or regulation and removed all reserve requirements. These all built to set up a situation that was extremely dangerous. So maybe the fumes were already in the warehouse and Greenspan taking rates down to 1 percent was the spark that ignited the conflagration.

So what are the take-homes? What do we do now?

It’s really simple. Go back through the past 20 years of radical deregulation and overturn all the rules that were changed. You don’t need all this Dodd-Frank legislation. Just reinstate Glass-Steagall, overturn CFMA. Just undo everything that was done in 2003, 2004, 2005 and 2006, remembering that old expression: If it ain’t broke, don’t fix it.

OK, let’s talk about some of the issues in the context of the books. Your first choice goes into the history of the Federal Reserve, and is called “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed.

This book won a Pulitzer – it’s a wonderful narrative covering a 50-year period from before World War I through the Weimar Republic, the Great Depression, and leading up to World War II. It tells that story through the lives of four central bankers – the head of the Federal Reserve in the U.S., of the Bank of England in the UK, of the German Bundesbank, and the French central bank. It looks at these four players, their professional actions on behalf of their countries as well as their personal relations. It tells the story of the economy, of the global crises that arose, of how people interacted, how governments interacted, what took place with monetary policy. It’s really a fascinating story.

How bad a job did the Fed do in the Great Depression, then?

Let’s put it into a broader context. The U.S. has always had a problem with the concept of a central bank. The initial central bank lasted for 20 years, and was then dissolved. Without a central bank modulating the currency, you tend to have wild swings in money supply, and in the economy you had a series of panics and depressions. So then we had the second Federal Reserve bank. Same thing – it had a 20-year lifespan, and then it died. The result is that by the time we get to the Great Depression the Federal Reserve is a relatively new institution, it’s only 15 years or so old. Its basic approach is rather modest – there’s not a lot of intervention, not a lot of pulling on the levers, there’s very much a recognition that historically, a democratic nation does not like an unelected central bank dictating economic policy. They had a hands-off approach. You really get the concept of that in “Lords of Finance,” not just within the U.S., but internationally. How it affected the post-World War I, pre-World War II period, what the central bank should have been doing – now that we have the benefit of hindsight – to moderate the effects of the downturn caused by the market crash and the Great Depression. And yes, it’s fairly obvious that had the central bank been a little looser in its credit policy, we would have had a less severe downturn. They may not have caused the Depression, but they certainly didn’t help it and they probably made it a lot worse.

The Great Depression is, of course, the period Ben Bernanke is an expert on. I got the sense from your book, “Bailout Nation,” that you don’t think he’s done such a great job, though.

My biggest problem with Bernanke is not so much him as chairman, as him as Fed governor under Greenspan. He didn’t see the problem coming and he enabled the ongoing reign of error of Alan Greenspan. When the economy is in an utter freefall, when everything is going to hell in a hand-basket, [Walter] Bagehot had the right ideas. The central bank should be the lender of last resort, it should lend on good credit at high rates. What the Federal Reserve did is that, in an attempt to save the banking system, they focused on saving the individual banks. I don’t want to get too wonky, but there are two approaches to respond to a banking crisis. There’s the Japanese way, or the Swedish way. The Swedish approach, which, by the way, is followed by the FDIC, is, “To hell with the banks, save the banking system.” If any given bank is insolvent, you fire the senior management, you wipe out the shareholders, you take the assets, you sell them to the highest bidder and whatever is left over goes to the bondholders. What you’re left with is good assets and preserved accounts. People who ran a bank poorly or invested in bad banks are suitably chastened by the market, and the system is saved.

Japan has its own keiretsu system [whereby banks are owned by companies and vice versa across the economy]. When Japan’s crisis began in 1989, if they had let Bank of Mitsubishi fail, the whole of Mitsubishi would have collapsed. So Japan’s approach was, “To hell with the banking system, save the banks, because if we don’t, everything else is going to go down.” Unfortunately, we took a page from the Japanese approach. Now it’s 30 years later, and Japan is still in a long-term recession.

Do you really believe we should have let those banks go bankrupt then?

Well, the way we let Lehman go down – just take a leap, face down, 50 storeys onto the concrete – no. That’s not the ideal way to do it. What we ended up doing with GM and Chrysler was a pre-packaged bankruptcy: You fire the senior management, wipe out the shareholders, renegotiate all the bad deals, and sell off all the bad assets. GM is having its best year in history! Had we done that with the bigger banks, we would be much healthier today. That tearing off the Band-Aid is much more painful at the time, but it would be healthier today, and more importantly, you don’t set up the [moral hazard] problems going forward. So five to 10 years from now, we don’t have some guy on a trading desk coming up with an idea and saying, “You know, if I take a little more risk, and use a little more leverage, if it works out, it’s a home run for me. But if it crashes and burns, it’s someone else’s problem!”

So how should the banks have been dealt with? You work on Wall Street, give me the specifics.

When Bear Stearns starts to wobble, a few people said, “Hey! We can’t let Bear Stearns go belly-up.” That’s where the mistakes start.

So they should have just been left to go under?

No, no. Here’s what happened. Jamie Dimon [the chief executive of JP Morgan] completely outplayed Ben Bernanke. Dimon went to Bernanke and said, “Look, we’re a counterparty with Bear Stearns, we could probably absorb them – but why should we step up? Normally we wouldn’t do this in a shotgun wedding, it would take a year to negotiate. I have a weekend to make this decision, so you have to guarantee $29bn of losses.” And the Fed did that.

If I had been the Fed chief, I would have said: “Let me explain this to you, Jamie. I know the history of JP Morgan.” (Everybody thinks Dimon is this genius who avoided the subprime situation, but that’s actually not true. They just ran into their subprime problem way earlier than everybody else, so when they had to liquidate, there was a bid there.) “I’m looking at the derivative book of Bear Stearns. It’s $8 trillion and you’re the single biggest counterparty. So if they go down, it’s your problem. So here is what I am willing to do. When you go into receivership, I’ll promise not to put you in jail! If you want to buy them, buy them. If you don’t want to buy them, we’re going to put them into a pre-packaged bankruptcy and if it ultimately causes JP Morgan to go bankrupt, well, put it this way, this is your opportunity to avoid it. So take a walk once around the park, and have a good think. As Fed chair, I have no problem testifying that I suggested you buy Bear Stearns because, if you didn’t, it really looked like they were going to blow up JP Morgan – and good luck with the shareholder lawsuits for the rest of your life.”

Instead, Dimon outplayed Bernanke. Bernanke is an academic, he was learning on the job. When the head of one of America’s biggest banks says “I’ll save your bacon, but you’ve got to do this for me…” He didn’t know better. Even at the time, a lot of people, including me, said, “This is outrageous for the Fed to give $29bn to JP Morgan to buy Bear Stearns.”

Going back to the underlying causes, the American obsession with deregulation played a big part. Your second book, “The Myth of the Rational Market” looks at the intellectual underpinnings of that worldview.

Yes, so everything was working fine. The original concept – which started under Carter but was accelerated under Reagan – was that government has gotten too unwieldy. Regulation is too costly, too time-consuming and there’s too much red tape. There is a legitimate argument that bureaucracies tend to feed on themselves, and you have to constantly hack back at some of the vines and undergrowth. But somehow, “Let’s clear out some regulations and make it easier for business,” morphed over time to become, “The market knows better than anybody else, let’s get rid of any and all oversight, any and all regulation, any and all things that get in the way of the efficient market.” So what started out as, “Let’s clear out some of the excesses,” became, “Let’s get rid of all the rules.”

In “The Myth of the Rational Market” Justin Fox explains all of the bad ideas that took root and allowed a very legitimate and worthwhile objective – getting rid of some of the really time-consuming, unjustifiable, expensive regulations that had grown over time – get so wildly imbalanced. He looks at why academics and many market theorists were so wrong about how markets actually operate. He does a wonderful job of telling the story of how the simple concept of the efficient market, the rational economic actor, got completely out of whack. You don’t have to be an economist or market theorist to appreciate the personalities, the story and some of the obvious delusions that took place and helped set the table for the collapse.

Yes, one review said, “It reads like an intellectual whodunit.”

It really does. By the way there are a bunch of other books along the same concept – “Zombie Economics” by John Quiggin, Yves Smith’s “Econned,” and Kevin Phillips’s “Bad Money.” There are a slew of these that are all about how academic economists – and especially the Chicago School and other believers in the Efficient Market Hypothesis (EMH) – got this totally wrong. There’s a simple reason for that, which is that when you build a model, you’re building a Platonic shadow of reality. It’s not reality; it’s a depiction of reality. Naturally, there’s going to be some variance and modelling errors. There’s that great George Box quote: “All theoretical models are wrong, but some are useful.” What that means is that you have to always remember, when you’re working from a model, especially a financial model making projections into the future, that you’re not dealing with a perfect reflection of everything that takes place in the real world. There are irrational things that take place that models typically don’t forecast. Human beings are not perfectly efficient, profit-maximising actors.

It’s happening right now with the Dodd-Frank Wall Street Reform and Consumer Protection Act – passed two years ago in the wake of our disastrous financial meltdown. Just last week, for example, both parties in the House overwhelmingly approved two bills that already would change Dodd-Frank’s rules on derivatives — those convoluted trading deals recently described by the chairman of the Commodity Futures Trading Commission as “the largest dark pool in our financial markets.”

Especially vulnerable is a key provision of Dodd-Frank known as the Volcker Rule, so named by President Obama after the former Federal Reserve Chairman Paul Volcker. It’s an attempt to keep the banks in which you deposit your money from gambling your savings on the bank’s own, sometime risky investments.

It will come as no surprise that the financial sector hates the Volcker Rule and is fighting back hard.

On March 26, Robert Schmidt and Phil Mattingly at Bloomberg News published an extensive account on the coordinated campaign being waged by the banking industry to persuade regulators to scale back reform. Headlined “Bank Lobby’s Onslaught Shifts Debate on Volcker Rule,” their report chronicles the many ways in which banks are turning up the heat, enlisting the help of clients, customers and other companies, among others. “Some banks recommended consultants and law firms,” they write, “… to help clients write letters arguing that the proposed language defines proprietary trading too broadly. Partnering with trade associations, the banks also commissioned studies, tested messages with focus groups, distributed talking points and set up a phone hotline for Capitol Hill staffers.”

The banks found another ally in the U.S. Chamber of Commerce, the biggest pro-business lobby in America, which helped put together a coalition of companies, including Boeing, DuPont, Caterpillar and Macy’s department stores.

In one instance, the banking behemoth Credit Suisse got an assist from a man named Robert Auwaerter, who oversees hundreds of billions as the fellow in charge of the fixed income group at Vanguard Group, a mutual fund company. He came to a briefing Credit Suisse held for three congressmen who belong to the New Democrats, a group of House members known “for their centrist and pro-business leanings.”

Auwaerter led the 90-minute meeting and said the three Democrats “were really receptive to our comments.” We’ll just bet. According to the Bloomberg News reporters, one of them, Joe Crowley of New York, “pushed back at one point, telling the group that he’d recently marched in a Lunar New Year parade in Queens with Thomas DiNapoli, the New York State Comptroller who oversees a state retirement fund of about $140 billion. Why wasn’t DiNapoli complaining about Volcker?

“The asset managers told Crowley they have a closer view of how the markets work than the pension funds that hire them. The proposed rule, they said, would slow bond trading, making it harder for them to execute their strategies. They predicted that would mean lower returns for funds like DiNapoli’s, as well as for 401(k) plans and individual investors.

“Less than two weeks after the Credit Suisse visit, 26 New Democrats signed a letter to regulators noting that ‘millions of public school teachers, police officers and private employees depend on liquid markets and low transaction costs’ to retire with ‘dignity and ease.’”

In other words, fellow members and regulators, lighten up on the Volcker Rule! A thick wallet helps, of course — lobbyists for the financial sector spent nearly half a billion dollars last year. And the congressional newspaper The Hill reports, “Members of Congress pressuring regulators to go easy on the ‘Volcker Rule’ received roughly four times as much on average in contributions from the financial industry than lawmakers pushing for a stronger rule since the 2010 election cycle, according to Public Citizen, a left-leaning group advocating for strict implementation.

“When it is all added up, opponents of a tough Volcker Rule received over 35 times as much from the financial industry — $66.7 million — than advocates for a strong stance, who received $1.9 million.”

All of which makes it darkly amusing to read in the April 4 edition of the financial newspaper The American Banker that, in the words of  Roger Beverage, president and CEO of the Oklahoma Bankers Association, “Congress isn’t afraid of bankers. They don’t think we’ll do anything to kick them out of office. We are trying to change that perception.”

Which is why Beverage and his colleague are creating the industry’s first super PAC.  They’re calling it – we’re not making this up – “Friends of Traditional Banking,” a smokescreen of a sobriquet if we ever heard one, vaguely reminiscent of the Chicago mobsters in Billy Wilder’s Some Like It Hot who dub themselves “Friends of Italian Opera.”

Matt Packard, the super PAC’s chairman, told The American Banker, “If someone says I am going to give your opponent $5,000 or $10,000, you might say, ‘Yea, okay.’ But if you say the bankers are going to put in $100,000 or $500,000 or $1 million into your opponent’s campaign, that starts to draw some attention.” Don Childears, president and CEO of the Colorado Bankers Association chimed in, “It would be nice to sit on the sidelines or sit on our hands and say, ‘Oh we don’t get involved in that stuff,’ but that just means you get run over. We need to get more deeply involved as an industry in supporting friends and trying to replace enemies.”

All of which demonstrates, as per Bloomberg News, “that four years after Wall Street helped cause the worst economic downturn since the Great Depression and prompted a $700 billion taxpayer bailout, its lobby is regaining its power to blunt or deflect efforts to rein in the banks.”

Nonetheless, just last week, The Wall Street Journal reported on how a movement to challenge big banks at the local level has gained momentum around the country. Activists want to restructure Wall Street from the bottom up.  As a result, the Los Angeles City Council is considering an ordinance that would gather foreclosure and other data on banks that do business with the city. Officials in Kansas City, Mo., passed a resolution directing the city manager to do business only with banks that are responsive to the community.  And here in New York City, legislation is pending to require banks to reinvest in local neighborhoods if they want to hold city deposits. Similar actions are underway in other cities.

They’re turning up the heat. You can, too.

In effect, U.S. top executives rake in obscene sums by not doing their jobs.

The Runaway Compensation Train

When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay.Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was “only” $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent “down” years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994.

It might surprise you to learn that in the early 1990s, executive pay was already widely viewed as out of line with what average workers got paid. In 1991 Graef Crystal, a prominent executive pay consultant, published a best-selling book, ”In Search of Excess: The Overcompensation of American Executives,” in which he calculated that over the course of the 1970s and ’80s, the real after-tax earnings of the average manufacturing worker had declined by about 13 percent. During the same period, that of the average CEO of a major US corporation had quadrupled! Bill Clinton took up the issue in his 1992 presidential campaign, and immediately upon taking office had Congress pass a law that forbade companies from recording as tax-deductible expenses executive salaries plus bonuses in excess of $1 million.

Unfortunately Clinton chose the wrong pay target. In 1992 salaries and bonuses represented only 23 percent of the total compensation of the top 500 executives named on proxy statements. The largest single component of executive compensation was gains from exercising stock options, representing 59 percent of the total. The Clinton administration left this so-called “performance pay” unregulated.

Perversely, one reaction of corporate boards to the Clinton legislation was to take $1 million in salary plus bonus as the “government-approved minimum wage” for top executives, and therefore to raise these components of executive pay if they fell short of that minimum. The number of named executives with salaries plus bonuses that totaled $1 million or more increased from 529 in 1992 to 703 in 1993 and 922 in 1994.

The other reaction of corporate boards was to lavish more stock options on their top executives. When the stock market boomed in the late 1990s, these executives cashed in. The average annual compensation of the top 500 named executives reached $21 million in 1999 with gains from exercising stock options representing 71 percent of the total, and $32 million in 2000 with option gains now 80 percent of the total.

From 1982 to 2000 the U.S. experienced the longest stock market boom in its history. Average annual stock-price yields of S&P 500 companies were 13 percent in the 1980s and 16 percent in the 1990s. So it didn’t require any great genius to make money from stock options. In fact, it became a no-brainer. In 1991, the Securities and Exchange Commission waived the longstanding rule that, as corporate insiders, top executives had to hold stock acquired through exercising their options for six months to prevent “short-swing” profit-taking. As before, executives did not have to put any of their own money at risk in being granted stock options. But now they could also pick the opportune moment to exercise their options without any risk that the value of the company’s stock would subsequently decline before they could sell the stock and lock in the gains.

The New Normal of Corporate Greed

The speculation-fueled “irrational exuberance” of the late 1990s brought unprecedented pay bonanzas to top executives, thus establishing a “new normal” for corporate greed. When boom turned to bust in the early 2000s, money-hungry executives had to look for another way to get stock prices up and make their millions. Their favorite “weapon of value extraction” over the past decade has been the stock buyback (aka stock repurchase). Top executives allocate massive sums of corporate cash to repurchasing their company’s own stock with the purpose of boosting their company’s stock price. Stock buybacks and stock options have become the yin and yang of executive compensation.

Let’s take a look at how it works: The board of directors of Acme Corporation authorizes the CEO to repurchase the company’s own outstanding shares up to a specified value (say $5 billion) over a specified period of time (say three years). On any dates within this three-year period, the CEO then has the authority to instruct the company’s broker to use the company’s cash to buy back shares on the open market up to the $5 billion limit and subject to the SEC rule that the buybacks on any one day can be no more than 25 percent of the company’s average daily trading volume over the previous four weeks. That might permit Acme to do buybacks worth, say, $100 million per day. It may be the end of the quarter, and the CEO and CFO want to meet Wall Street’s expectations for earnings per share. Or they may want to offset a fall in the company’s stock price because of bad news. Or they may want to ensure that the increase in the company’s stock price keeps up with those of competitors, who may also be doing buybacks. Whatever the reason, by the laws of supply and demand, when the corporation spends cash on buybacks, it “manufactures” an increase in its stock price.

Then, with the stock price up, the CEO, CFO and other insiders may choose to cash in their stock options. Presto! They make tons of money for themselves.

Meanwhile, these executives will tend to ignore investments in innovation and training. Some companies actually fund their buybacks by laying off workers, offshoring jobs to low-wage countries, and taking on debt. The top executives’ weapon of value extraction becomes a weapon of value destruction. They are rewarded handsomely by not doing their jobs.

In 1981, 292 major corporations spent less than 3 percent of their combined net income on buybacks. In 1982, however, the SEC passed a rule (10b-18) that gave corporations that did very large-scale stock repurchases a “safe harbor” from charges of stock-price manipulation. Buyback activity then became larger and more widespread, increasing substantially over the course of the 1990s. From 2003 to 2007, buybacks really took off, and by 2007 the very same 292 corporations now spent over 82 percent of their net income repurchasing their own stock.

The financial crisis and the Great Recession forced a slowdown in buybacks. S&P 500 companies repurchased a record $609 billion in 2007 but pared it down to $360 billion in 2008 and $146 billion in 2009. They stepped it back up to about $289 billion in 2010 and an estimated $440 billion in 2011. It is quite possible that buybacks in 2012 will be even higher than in the previous record year of 2007. And look for executive pay to increase as well.

Concentration of Income at the Top

Make no mistake about it. Executive pay is a prime reason why in 2005-2008 the top 0.1 percent captured a record 11.4 percent of all household income (including capital gains) in the U.S., compared with 2.6 percent three decades earlier. In 2010 (the latest Internal Revenue Service data available), this number was 9.5 percent. The income threshold among taxpayers for being included in the 0.1 percent in 2010 was $1,492,175. Of the executives named in proxy statements in 2010, 4,743 had total compensation greater than this threshold amount, with a mean income of $5,034,000 and gains from exercising stock options representing 26 percent of their combined compensation.

Total corporate compensation of the named executives does not include other non-compensation income (from securities, property, fees for sitting on corporate boards, etc.) that would be included in their IRS tax returns. If we assume that named executives whose corporate compensation was below the $1.5 million threshold were able to augment that income by 25 percent from other sources, then the number of named executives in the top 0.1 percent in 2010 would have been 5,555.

Included in the top 0.1 percent of the US income distribution were a large, but unknown, number of US corporate executives whose pay was above the $1.5 million threshold but who were not named in proxy statements because they were neither the CEO nor the four other highest paid in their particular companies. To take just one example, of the five named IBM executives in 2010, the lowest paid had total compensation of $6,637,910. There were presumably large numbers of other IBM executives whose total compensation was between this amount and the $1.5 million top 0.1 percent threshold.

Let’s Put CEOs to Work for Us

Under the Obama administration, virtually nothing has been done to constrain top executive pay. President Obama signaled his unwillingness to take on the issue when, in an interview in February 2010, he was asked about the many millions paid in 2009 to Jamie Dimon, CEO of JPMorgan and Lloyd Blankfein, CEO of Goldman Sachs, in the wake of the financial meltdown and bank bailouts. “I know both those guys; they are very savvy businessmen,” the president said. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

The “Say-on-Pay” provision in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act sounds good, but it just reinforces a system of incentives the does not work. This provision gives public shareholders the right to express their non-binding opinion to corporate management on issues related to executive compensation. If Congress had understood what drives executive pay in the U.S., however, it would have recognized that the granting of Say-on-Pay rights to public shareholders is part of the problem, not the solution. Through a combination of stock options and stock buybacks, Say-on-Pay provisions reinforce an alignment between the incentives of top executives and the interests of public shareholders that has been undermining investment in America’s future.

It is about time that we took control of exploding executive pay. It is not just that the sums involved are unfair, and as history has shown, will only become more obscene. These executives control the allocation of resources that represent the well-being of the 99 percent, and the ways in which they bank their booty is doing severe damage to the U.S. economy. The investment strategies of business corporations are too important to be left under the control of those who gain when the 99 percent lose.