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The Grasso Affair

Mises Daily: Friday, September 26, 2003 by

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Did anyone shed tears for Richard A. Grasso? That embattled little man who resigned from his job as chairman of the New York Stock Exchange was at loggerheads with the New York Stock Exchange Board about his retirement pay package of $188 million, a huge sum that was nonetheless contractually agreed to over his years of service. For the vast majority of workers making ends meet on five-figure incomes despite an overweening federal government, it was difficult to empathize with that bald-headed man whose face became the first symbol of corporate greed in the new millennium.

Grasso notified the NYSE Board of Directors of his decision to retire in 2007, not long after receiving plaudits for his guidance of the NYSE during trials associated with the late 1990s stock market bubble (which caused a challenge to the Exchange from NASDAQ), and the financial bust that followed (which was aggravated by the interventionist aftermath of 9/11). The $188 million figure resulted from several years of deferring compensation that Grasso no doubt now wishes he accepted when given the chance.

But now it is too late. As soon as the Board made the retirement announcement public, financial news formats around the country were reduced to the slogan "All Grasso, All the Time". The pressure proved to be too much for Grasso, who had initially assumed a defiant pose in the controversy. His continued tenure at the NYSE was doomed from the start.

This essay is not to defend large corporate pay packages that have returned to the front pages in recent years. I am not in a position to know whether Dick Grasso's labors at the NYSE were worth $188 million, half that amount, or twice it. Grasso (the labor supplier) and the NYSE Board (the labor demander) voluntarily agreed to it, which is consistent with an ethic of liberty. I do know, however, that envy is a powerful force that politicians manipulate to pit favored groups against unfavored groups, that envy has been the tool of the Democrats since the 1930s, and that this incident reeks of their efforts in this regard.

Where, for instance, was the concern for corporate pay schemes in the 1990s?  The answer, of course, was that during the New Economy, the Democrats held the White House and such a stance was unnecessary. This explains why we usually hear about concerns for corporate greed when that party is out of power. Remember Michael Milken and T. Boone Pickens?  They were so Reagan-Era.

But in the Clinton-Era a few years later, when the socially-correct Disney Corp. announced that its chairman, Michael Eisner, earned more than $575 million in 1998, no one heard a peep from the DNC chairman. The DNC chairman himself, Terry McAuliffe, cashed in on Global Crossings stock in 1999 for an eight-figure return from a two-year old $100,000 initial investment in a deal that wasn't exactly made available to the retail brokerage houses. But no one cared about such deals back then, as well as many like them, because they were consummated when the party that normally profits from envy was already in power.

Seen in this light, today's hubbub about Grasso makes perfect sense. His troubles today will translate into an ideal theme for the Democratic convention next summer.

I also know that contracts like Grasso's, voluntarily agreed to, are the backbone of the free market, one that socialists of the world must discredit in order to attain any influence in the private sector that prospers from ignoring them. Fueling the public's concern about corporate pay is one vehicle for legitimizing this influence. How can socialism ever advance if the right of private individuals to own and allocate their own resources is not continuously challenged?

This attack on a private contract was among the most unsettling aspects of the Grasso affair. He broke no law and only requested that the NYSE Board abide by the terms to which it agreed. His deferred payments over the years amounted to loans to the New York Stock Exchange for which he could reasonably assume to be compensated. Instead, he was demonized by the press, the topic of possible congressional hearings, and forced out of a position he had intended on maintaining for another three years. We can be sure that bonus-deferring executives around the country took notice.

Not that Grasso deserves our undiluted pity. He was very much the player who profited greatly from his position balancing the needs of private investors and savers with those of a growing regulatory state that found political gain in the stock bubble. And doubtlessly, at least since the Great Depression, this regulatory state contributed to the NYSE's monopoly power in stock trading, a result that made Grasso's pay package possible in the first place.

One could imagine a different sort of market developing absent such intervention, resulting in many venues for trading stocks, so that if one exchange charged monopoly prices and paid enormous retirement packages for executives, savers and investors that objected could choose to trade on competing exchanges. Such is the manner in which private institutions operating through market forces deal with problems more complex than this one all the time (much to the chagrin of the political establishment and would-be monopolists).

It should be noted that some of Grasso's bonuses rewarded him for his closing of the stock market during the days following 9/11, a cowardly action that amounted to the handing of private resources over to the nation-state. This is fascism at its core. In another time and in a freer country, his board would have fired him for such a compromise that removed one of the most important segments of the financial market when it was most needed.  

Tears should be shed as a result of this smarmy affair. They certainly are required for the increased legitimization of the deadly sin of envy in the culture wars. A central theme of the popular Michael Moore documentaries is that successful businessmen are simply adept at profiting from a zero-sum game. This argument was the central theme of the anti-Grasso campaign.

No one should be glad when socialism scores points in the public square, which it certainly did when Grasso announced his resignation. When such things happen, it is time for defenders of liberty to reevaluate their strategy for explaining and defending basic human rights that only government can take away, such as the right to contract. It is also an occasion to reload for the next battle.   

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Christopher Westley, Ph.D., teaches economics at Jacksonville State University. See his Mises.org  Daily Articles Archive. Send him  MAIL.