September 3, 2003
Grasso’s Plunge Protection Premium
By Brady Willett & Todd Alway

First and foremost, before beginning any discussion on NYSE Chairman Dick Grasso, it should be noted that he is alleged to be a member of the elite and highly secretive Plunge Protection Team. Accordingly, and since Dick is entrusted with a secret playbook that can be used to attack what is perceived to be unacceptable weakness in stock prices, his mandate is not necessarily an open book.  For this reason, Mr. Grasso’s compensation – which has come under increased scrutiny in recent weeks – should not be the topic of discussion. Rather, Mr. Grasso’s actual job description should. 

Dick Grasso, who joined the NYSE in 1968 (landing the role of President and Chief Operating Officer in 1988, and Chairman in 1995), was regarded as somewhat of a miracle worker before the bear market seriously entrenched (late 2001-2003). To be sure, since taking over as Chairman in 1995 listings at the NYSE have more than doubled, Grasso’s mug has appeared on a box of Wheaties, and following 9/11 – reportedly sleeping and eating at his office – Grasso helped ensure that the Big Board was up and running only six days later. In short, and as one veteran NYSE trader put it in early 2003 ‘He's [Grasso] one of us, he's absolutely dedicated to the exchange’.

It is in this light that his recent $140 million retirement payout has come under scrutiny.  After all, if he is just “one of us” than why is he being compensated like he is one of them – corporate big-wigs (like those on the 27 member board of directors of the NYSE) that benefited disproportionately from the stock market bubble.  However, it is the notion that Grasso is just “one of us” – either a trader or even a mere regulator – rather that his compensation that is suspect.  After all, was Grasso scurrying away in his office following 9/11 to ensure that trading mechanisms would operate normally or was he trying to concoct temporary rules and restrictions to combat what could have been a free market run to the exits by investors? Was he investigating and prosecuting specialist firms with vigor during his tenure, or was he keeping the floor tilted in order that the true depth of corporate malfeasance, and the panic it would cause amongst investors, remained concealed? Was Mr. Grasso simply robbing the piggy bank of the self-regulated, not-for-profit organization he heads, or was he receiving payment for a job well done?

From the point of view of his public persona of chief regulator, it is readily apparent that Mr. Grasso’s pay is excessive. According to a recent report from the Council of Institutional Investors, if Grasso were heading a public company his pay would have been roughly $3 million in 2002 instead of $10 million (based upon revenues).  Using another set of statistics which includes bonuses, stock options and grants as well as salary, CEOs of the 500 largest companies on average made about $6.2 million in 2002 - $3.8 million less than Grasso’s comparable figure.

However, compared to other NYSE board members – including Sachs Paulson ($8 million in 2002), Viacom’s Karmazin ($20 million), and Morgan’s Harrison ($9.1 million) – Mr. Grasso’s paycheck is not as excessive.  Such is why Forbe’s Ackerman recently concluded that Grasso’s pay is understandable

“…when it comes to establishing his pay scale, Grasso must prefer to look at his own board rather than, say, the Baruch College School of Business advisory council. His members in turn look at their own paychecks and decide that Grasso, nice fellow that he is, should be treated likewise.”

Grasso’s Hypocrisy?

What has caught the attention of investors, commentators, and SEC Chairman Donaldson is not necessarily Grasso’s fat paycheck, but the example Grasso should be setting for others.  Firstly, should Grasso be a director of a listed NYSE company – Home Depot – and also be asked to regulate this same company?  If your answer is yes to this question perhaps you also believe that there is nothing wrong with Harvey Pitt being the head of the SEC while holding secret meetings with accounting firms that are under investigation…

Second, Grasso appears to be out of touch with reality.  To be sure, he went on the television circuit and did multiple interviews only a few months ago claiming that the NYSE was the standard setter:

“Our marketplace is the standard setter, not just for capital markets in the United States, but for worldwide markets and we should be held accountable to the same standards we expect of public companies. The public expects it of us, we expect it of ourselves and it's exactly, exactly, Susie, what we plan to do.” NBR

Same standards?  Already noting the different rules by which Grasso is compensated when compared to public corporations, Patrick McGurn, special counsel at Institutional Shareholder Services in Rockville, Md put it another way: “If the exchange went public tomorrow and applied to trade on the NYSE, it wouldn't meet its own listing standards”

Grasso’s Heroism?

So what exactly has Grasso done to merit his compensation? Is there more to Grasso than this muddled and conflict of interest ridden public persona? 

The short answer is that Grasso’s role as a plunge protector is what entitles him to such exorbitant renumeration.  Quite frankly, unlike other PPT members such as Greenspan (playing the role of the honest banker) and SEC Chairman Donaldson (playing the role of the honest regulator), Grasso is the one down in the pits getting his hands dirty; should the PPT need to stop a precipitous fall in stock prices Grasso will be the middle man - from the Fed’s pocket to Grasso, and then mysteriously to the floor. He will be the one traders and investors look to for guidance. Suffice it to say, during those dramatic declines where the services of the PPT are required, what is needed is a man who will swindle, backstab, and shake hands with the devil in order to bring the markets back from the depths.  In an environment where corporate deceit and accounting shenanigans are what is required for the “good” of the nation, a certain type of moral character is required. Thus, Grasso’s high paycheck is a perverse proof that he is the right man for the job.

Of course the question of whether an overvalued stock market – plunge protected or not – is good for the country is another issue altogether.

Conclusions

Mr. Grasso is worth every penny to those institutions that profit from the dated structure of the New York Stock Exchange. After all, under his leadership their corporate directors have been able to profit handsomely. However, while CEOs may have been able to take advantage of the institutional structure Grasso maintained, tit-for-tat does not explain the whole story.

When selling pressures build in the marketplace the plunge protecting Grasso will earn every penny if he can somehow keep Wall Street and investors buying stock on one of the most outdated exchanges in America. 

a