Chutzpah: Businessmen behaving badly

Chutzpah is a Yiddish word that does not have a simple English synonym. It combines the concepts of insolence, gall and audacity. An example is the young man who murdered both his parents and then asked the court for mercy because he was an orphan. A recent example was a lawsuit filed against the U.S. government in 2011 by some shareholders of AIG.

Starting in 2008 the U.S. government spent $182 billion to save AIG from bankruptcy. The company had recklessly written insurance contracts to protect major banks in the case of defaults on the junk mortgages that the banks were holding in their own portfolios. The banks were not worried about the junk mortgages they had already sold to gullible customers. AIG had neglected to take any reserves against the possibility that they might have to pay out on this insurance. As part of the bailout of AIG, the government charged 14.5 percent interest and took a 92 percent stake in the company. AIG is now profitable again and has repaid the government. The 2011 stockholder lawsuit complains that the interest rate was too high, that the government took too great a percentage of the company, and that the rescue amounted to a taking of private property for public use — in violation of the Fifth Amendment. That is like saying that you did save me from drowning, but I had only gone under twice and if you had not insisted in rescuing me prematurely I might have found someone more sympathetic to rescue me. That kind of chutzpah requires a creative lawyer.

One of the best practitioners of chutzpah in the business world is David Cote, the CEO of Honeywell. Mr. Cote was appointed by President Obama to the Bowles-Simpson Commission on Fiscal Responsibility, and he was one of 12 CEOs who met with President Obama in November to offer advice on the fiscal cliff. Mr. Cote often seeks media opportunities to express his opinions. In a May 2012 interview on CNBC, he said that he thought the effective corporate tax rate should be zero in order to encourage job creation. While in Washington in November, he lobbied and gave an interview on CBS saying that budget cuts must first come from Social Security and Medicare.

Now it is not unreasonable to argue for a reduction in the 35 percent corporate tax rate, but to do so without explaining that your own company paid an average of only 2 percent in taxes from 2008 through 2011 on profits of $5.2 billion, and that during the same period Honeywell received tax subsidies of $1.7 billion, requires a little chutzpah.

At the November White House meeting, Mr. Cote urged the president to exempt all foreign earnings of U.S. corporations from U.S. income tax and pushed the idea on TV without mentioning that Honeywell has more than $8 billion in profits in offshore accounts and would have a $2 billion tax windfall if foreign earnings were exempted. He told CNBC that lower corporate taxes will create jobs, but he failed to say that Honeywell has created 10,000 new jobs overseas since 2007 while eliminating 4,000 jobs in the U.S. He failed to mention that Honeywell already had taken advantage of the 2004 American Jobs Creation Act, under which the company repatriated more than $2.5 billion at a specially reduced tax rate of 5.25 percent instead of the standard 35 percent. Almost 40 percent of that money came from tax havens. A condition of the temporarily reduced tax rate was that the repatriated funds be used for job creation and research, and specifically not to repurchase stock. During the four years of tax relief, Honeywell’s employment went down by 3,000 and stock repurchases went up from $37 million to almost $4 billion. With that background, Mr. Cote’s public statements qualify as chutzpah.

Mr. Cote also suggested on TV that, in addition to lower corporate taxes, we must cut government expenses. Of course he did not suggest that we cut the $725 million in government contracts given to Honeywell in 2011, but he did reiterate the highest priority should be cuts in Medicare for the elderly and raising the retirement age to reduce the cost of Social Security. Now Honeywell has a company pension plan for its employees, which they might hope to rely upon to supplement the reduced Social Security payments that Mr. Cote advocates for them. Would it be chutzpah on my part to mention that the company owes its employee pension fund $2.8 billion while it has $8 billion profit in offshore accounts?

While it is reasonable to suggest that we need to address the rising costs of Social Security, I don’t think Mr. Cote needs worry if we accept his recommendations. The average monthly Social Security check is $1,237, but Mr. Cote was paid over $25 million in 2011. His Honeywell retirement account is worth $78 million. If he retires at age 65 (much younger than he suggests for the average Social Security recipient), he can expect $428,000 per month. One possible fix to Social Security that Mr. Cote did not mention is eliminating the cap on earnings subject to Social Security taxes. Currently only the first $110,100 of earnings is subject to a 10.4 percent Social Security tax, and so Mr. Cote paid $11,107 in Social Security taxes last year. If the cap on earnings were lifted, he would have paid $2.6 million. The Congressional Research Service analyzed such a proposal and concluded that it would eliminate 95 percent of the expected Social Security shortfall
over the next 75 years.

In case you feel I have been too harsh in singling out Mr. Cote as a leading business practitioner of chutzpah, let me assure you he has lots of company. Eighty corporations have raised $60 million for a “Fix the Debt” campaign in Washington. Sixty-three of them are publicly held and stand to gain a total of $134 billion in tax breaks if Congress exempts their repatriated foreign earnings from taxes. The biggest winner ($35 billion) would be GE, whose CEO, Jeff Immelt, is chair of the president’s Council on Jobs and Competitiveness. Of the 63 publicly held companies, 24 paid their CEOs more in compensation in 2011 than the companies paid in federal income tax. U.S. companies have an estimated $2 trillion cash stored in offshore accounts and wish to avoid the current 35% corporate income tax that would be charged by bringing it home. Even a 10% corporate tax rate would contribute $200 billion to our budget.

If any of you are worrying about the future of jobs in this country, I am sure you will be heartened by Mr. Cote’s explanation of his personnel philosophy to CBS. He said, “I let people attrit.” If all this is making you a little hot under the collar, may I suggest you go over to the Honeywell thermostat on your wall and turn the temperature down a few degrees?

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