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Lou Doesn’t Stand With Speculators, Either

Louis B. Gerstner Jr., who was one of the best business managers of his era, has tracked down the people responsible for running so many companies into the ground. There’s just one problem: Gerstner’s scapegoats don’t actually run anything.

In a recent interview, Gerstner pointed the finger at speculators and other short-term investors. This presumably includes on occasion The Carlyle Group, a leading private equity firm of which Gerstner was chairman between 2003 and 2008. This stint at The Carlyle Group followed a decade in which Gerstner, as chairman and CEO of IBM, was widely credited with rescuing that company from irrelevance. (IBM continues to thrive on the track Gerstner set it. It reported solid second-quarter earnings last week despite the global economic downturn.)

Now, Gerstner, 67, wants to take most of the fun out of short-term profit by taking most of the profit. In the interview, he proposed an 80% federal tax on gains from investments held less than six months. Figure in state and city taxes in a place like Manhattan, and a trader might actually be allowed to keep just a few cents out of every dollar of profit. But Gerstner generously suggested that the federal rate drop to 60% after six months and reach zero after five years.

If this sounds familiar, you might recall President Obama stepping in front of the cameras on April 30 to assail “a small group of speculators” for “endangering Chrysler’s future” by, of all the gall, asserting their legal rights under securities for which those so-called speculators had paid their own good money. “I don’t stand with them,” said the president. Instead, he stood with the Chrysler workers and retirees whose claims were legally inferior, but politically far superior, to those of the hedge funds and other investors who held Chrysler debt.

Investors, the president said, ought to be motivated by the spirit of shared sacrifice he envisioned for Chrysler. In this grand vision, the president carefully reserved the greatest share of the sacrifice for supporters of his political opponents.

Enter Gerstner, whose r√©sum√© also includes high-level stints at RJR Nabisco, American Express and McKinsey & Co. The ex-CEO said his proposed confiscatory taxation is targeted at combating the “greed or...inefficiency that comes out of excessive focus on the short term.” But if Gerstner doesn’t want investors to be motivated by money, what does he think should guide their actions? The “spirit of shared sacrifice” again? If so, he ought to be happy. Just about every stock investor shared plenty of sacrifice in last year’s meltdown. Maybe folks who sold before the crash should have their capital taxed away so they can share the sacrifice, too.

“Excessive focus on the short term” certainly can kill a business. Chrysler and General Motors are examples. So are the financial companies that ignored risk in pursuit of profit in the recent bubble. But the people who need to be refocused are corporate managers, not shareholders who have no say in the day-to-day decision-making of a company. Gerstner pointedly did NOT propose an 80% tax on the compensation of corporate executives and directors whose remuneration is based on profits that turn out to be illusory.

While he did acknowledge that “there’s been astoundingly unnecessary, excessive executive compensation in certain instances,” Gerstner dismissed the issue, saying that “the system can fix itself without rigid rules.”

So, let’s restate for clarity: Failed companies and overpaid executives can be dealt with by the marketplace “without rigid rules,” but nasty speculators who succeed in making money legally and honestly should have four-fifths of that money confiscated.

This line of thought would not be surprising coming from a president who is more concerned with getting the results he wants than with the property and contractual rights he might abridge along the way. It is not what one would expect, however, from someone who has Gerstner’s appreciation for how the private sector works.

If we had a Hall of Fame for CEOs, Gerstner would be a shoo-in for election on the first ballot. But time dulls the luster of all stars sooner or later. Gerstner’s muddled thinking on his tax proposal might just have come on an off-day, or it might mean he no longer has the intellectual tools that made him great.

I don’t stand with him on this one.

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