This Little Pig Ran the Exchange Market

Last year it was Ebbers, Kozlowski, and Ken Lay who the Federal Reserve was after. This year it's the regulators themselves, revealed to be hauling down offensively huge salaries, paid by the very entities they were supposed to be regulating. Former Chairman of the New York Stock Exchange (NYSE) Richard Grasso wasn't a crook per se, he was simply a pig lunching in the Pool Room at the Four Seasons.

Everybody cheers when some local folk hero wins a $100-million lottery. There's a randomness to it that we can enjoy. If we had bought the winning ticket, we might be standing in the winner's circle. But corporate types who have drawn down these giant payoffs in the past decade are viewed as offensive, resulting from favoritism or unscrupulous operations outside the law.

Lacking Judgment

Grasso suffers from some very poor judgment. Last year, there was a big flap about the fact that he sat on the board of Computer Associates (CA). Almost 2 years ago, market analysts warned about his owning CA because its top officers and founders had paid themselves about $500 million in stock grants. The company also recently settled with the SEC over problems with very aggressive accounting techniques that overstated earnings. Grasso was supposedly regulating this company in his position as head of the NYSE. That didn't seem to stop him from taking a position on its board.

The recent criticism circulated around his very excessive pay package. Who knows what was wrong with the people on the NYSE Compensation Committee, but they all signed off on his salary. In recent days, they all seem to have developed amnesia, forgetting about yet another $48 million of deferred compensation that Grasso has now waived.

Laughing to the Bank

Grasso's departure appears to have been precipitated by the SEC's requests for information about how the NYSE's own internal corporate governance was being conducted. When Bill Donaldson, current chairman of the SEC, preceded Grasso as head of the NYSE, he earned a comparatively meager $1 million to $2 million per year for his efforts. Grasso, it should be noted, helped push Donaldson out the door before he was ready to leave.

Nobody likes to leave office by being shown the exit (in Grasso's case, the side door), but it's a lot easier to handle when you leave with a $140-million paycheck in your pocket. If you're old enough to remember Jack Benny, he always used to joke about going down to the basement to roll around in his money. Mr. Grasso will need a very large basement or have to roll around in $100 bills if he plans on a home-sized safe.

Changes in the Works

Going forward, the NYSE has many issues on its plate that Grasso never seems to have addressed head on. Not the least among them is the antiquated process of human beings interacting face-to-face on the floor of the exchange to execute stock trades. In most emerging markets around the world, stock trading is done electronically.

Alternative techniques are a major threat to the NYSE, still a privately held, nonprofit amalgam of "seat holders." Seats these days trade for around $2 million. The NYSE represents the Citadel of Capitalism. What happens to it holds serious ramifications for the City of New York, its home for 200 years. Grasso will be laughing every time he checks his bank balance in the middle of the night. The NYSE will begin a period of serious reflection and contemplation about its future. Hopefully, it will emerge better and stronger, but that's less clear than the good times that await Grasso.

Joan E. Lappin is president and CIO of NYC-based Gramercy Capital Mgt Corp, which has been top-rated in the Nelson's Directory of Registered Investment Advisors. Her investment outlook for 2003 was featured in the year-end BusinessWeek double issue. For questions, comments, or to attend an investment seminar, call 212-935-6909 or e-mail jlappin@gramercycapital.com.