Why Does Paul O’Neill Keep His Alcoa Options?

As of last week, what has long been suspected by this

correspondent was made clear: The weather forecasts are the work of the same

people who put together the “official” economic statistics. The blizzard never

arrived on Monday; on Wednesday, the National Association of Realtors, red of

face, confessed that its home-sales figures were wrong. As John Crudele keeps

pointing out in the New York Post ,

the job-count books at the Labor Department-which came out later in the

week-are completely cooked, and Grant’s

Interest Rate Observer has anatomized the utter phoniness of the Commerce

Department’s “anhedonic” productivity figures.

Both weather and economics involve a stew of information

gathered and processed by the “miracle” of modern information technology and

stirred to a boil by  those in a

position to profit from them most immediately: in weather’s case, the “keep

listening” media; in the economy’s, the permanent Washington bureaucracy.

Forecasts are couched in quasi-scientific doublespeak. (Am I the only one to

note the similarity, gobbledygook-wise, of the utterances of the so-called

“hurricane experts” at the Weather Channel’s Storm Watch to the pronouncements

of the chairman of the Fed concerning the direction of the economy?) A

media-driven overreaction ensues: Schools are closed, shares are dumped. In the

end, neither proves to have borne much relation to eventuating reality.

We live in confusing times. Lesser mortals are probably

better advised to stop up our ears and stick to a policy of empirical

wait-and-see when it comes to great matters such as the economy and the


What, for example, are we to make of the tax cuts? One cadre

of Great Men tells us one thing, another cadre tells us another. Sometimes the

contradictions are so weird as to defy all rational explanation. Take the

inheritance, or death, tax. For whatever reason, its most vocal opponents in

the press include large numbers of people with little money and not much more

in the way of expectation, or whose inheritance was realized overseas, beyond

the reach of the tax man. Are these people-whom I know a bit about

personally-merely trying to please their masters? Who knows? On the other hand,

the richest people in the nation have come out strongly against repeal or substantial reduction of the death tax. So you

have the poor being for something

they by rights should oppose, and the rich opposed

to something they by rights should be for. Go figure.

Unhappy circumstances have now made the death tax a

significant, one might almost say “punitive” fact of my own existence. When

this is all finished and Uncle Sam has been paid in full, I can assure you that

no private banker is going to solicit my business. I have been asked whether I

still believe in the inheritance tax. I certainly do in principle-even if it’s

no more than a gut feeling that such a tax is part of our special fabric,

another small reason why America works as well as it does compared to other


I do think the bar is set too low; that we tax as rich what no longer is rich, at least by the standards of

our time going back a couple of decades at least. The statistics used to argue

for repeal-that the tax affects too few estates-are phony. They refer to the

wrong generation of wealth holders: We’re looking at then when we need to be looking at now . The advocates of repeal assert that few estates-right around

1,000-exceeded $20 million dollars last

year , which they say is too low a number

to bother with. But I say that the $20 million “entry level” barely qualifies

one to subscribe to Forbes , let alone

make its U.S. 400, which encompasses pretty close to 1,000 individuals , if you adjust for families. If America were

neutron-bombed tomorrow, how many individual estates would have a value in

excess of $20 million? My guess is probably more like 50,000, a figure that

might considerably alter notions of relative equity and the terms of debate.

And then there’s this: Discussions of the pros and cons

invariably overlook the benefit of “stepped-up” basis, which amounts to an

at-death forgiveness of capital gains. Bill Gates’ many billions in Microsoft

stock have a tax basis measured in pennies, and therefore a capital-gains

liability measurable in billions. The effect is a pro forma tax benefit equal to 40 percent of the top death-tax

rate. The tax is still punitive, but not quite as much as its opponents claim,

since most substantial estates involve large amounts of massively appreciated

property. It is a consideration that must have occurred to Messrs. Buffett,

Soros et al. when formulating their arguments in favor of retaining the death

tax. Actually, all these proponents of estate taxation need to do is send a

copy of Bright Young Things to every

member of Congress. That should encourage a doubling of the death rates.

The rich-or those with access to capital-have had the best

of it by far for two decades now. The disproportion will only intensify if we

slide into recession. I suspect there was never a better time to be rich than

during the Depression, as long as you could keep your conscience under control.

It takes capital to hide or shelter capital. Everywhere one

looks, one sees inequities that permit the rich to pile it up unhindered and virtually

untaxed. In stock options, I.R.S. audits, overseas gimmickry-the evidence is

everywhere, and disgusting. But even the largest trough can only accommodate a

certain number of pigs. Eventually the hogs turn on each other.

This is what is happening with Fannie Mae and Freddie Mac

and the other federally sponsored entities that have a clear market advantage

because investors believe their paper to be guaranteed by Uncle Sam (a.k.a. We

the Taxpayers), at least morally. When a giant like G.E. Capital squares off

against Fannie and Freddie, the fight is going to finish someone. The new

administration claims to be against welfare for big business, which has been

public policy for 20 years now. Will Pennsylvania Avenue pick the moral dog in

this fight? I’m not sure it will, and that makes me unhappy.

One reason is this business of Treasury Secretary Paul

O’Neill and his Alcoa stock and options. I don’t like any part of this. For one

thing, it’s my understanding that there is a power-generation crisis out west,

and the largest component of the aluminum-smelting process is electricity. I

once worked on the multimillion-dollar (I suppose today it would be multi billion -dollar) financing of a new

aluminum facility in the state of Washington, whose principal if not sole

reason for coming into existence was that a big block of “Bonneville” (i.e.,

federally subsidized) megawattage was available on the cheap. I also don’t

understand the process-as reported in The

New York Times -whereby Mr. O’Neill, while chief executive of Alcoa,

returned 993,372 shares to the company in return for cash sufficient to pay off

capital gains and buy a new 1,200,000

shares via options. But then, there’s practically nothing about modern-day

options schemes that I-let alone the I.R.S.-either understand or can do

anything about. What I do know is that I don’t like the idea of the Treasury

Secretary actively buying, selling and swapping shares and options in his old

company while theoretically minding the economic store.

I would like to see 80 percent of any tax cut go to the

bottom 30 percent of the tax-paying public-people who will spend it. Since

every dollar spent is ultimately somewhere saved, the effect on the national

balance sheet will be pretty close to what it would have been under the rich-get-richer

scenario, but the effect on economic activity at the point where economic

stimulus should start-namely the cash register-will be salutary. Let Wall

Street take care of itself. It usually manages.

In 1992, I wrote a short book-never published-that asked a

lot of questions about the direction American life was taking. The intervening

decade has thrown many of these issues into ever-higher relief. The basis of

the book was a concern for equity: about who gets what and how they go about

getting it in a society that makes considerable pretensions to justice, if not

fairness. Fannie and Freddie figured largely, as did L.B.O. financing. But I

also dwelt at length about the responsibilities that go along with comparative

advantage, especially if that advantage has been to any significant extent

financed with what I call the “Public Capital,” including the full faith and

credit of We the Taxpayers-all of us. About how this last trick is accomplished

by those with the cash and the connections.

Over the past few years,

I have watched with a mixture of amusement and chagrin as one issue after

another raised in my book has been put thumpingly on the table. How Washington

faced up to these has been disgraceful. One reason, as I wrote a few weeks ago

in this space, was that the 1993-2000 government was in the hands of people

with too little personal experience of wealth. Such people tend to overrate

money; they give it too much respect.

The new administration consists of men who know what

personal wealth sounds, looks, feels and tastes like, and who understand how

money is made in this country. From this experience might come perspective,

might come wisdom in prosecuting the great business of the Republic. This is

what we would wish for.

But from this experience of wealth might also come an

arrogance of entitlement. That was the danger. I remain hopeful, but I am

starting to worry. Is moral and ethical erosion-bald conflict of interest-to be

a condition of every administration? Mr. O’Neill should sell his Alcoa and buy

Treasuries-if he can find any.

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