The Regulation That Ate Your Paycheck
In 1982, John Shad gave corporations legal cover for market manipulation. We have been paying the price ever since.
This is Part 2 of 3 of digging a wealth gap hole. In Part 1, we discussed how GDP has been used for exactly the purpose its architect, Simon Kuznets, warned against. The piece ended on a question: If the economy has been producing more, where the hell did all the money go?
This is the answer. This Grim History tale involves a man most people have never heard of and a date — November 1982 — that every American should now memorize.
It is the date the American social contract was signed away.
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The Most Consequential American You’ve Never Heard Of
His name was John Shad. Born in Utah in 1923, he climbed to vice chairman of E.F. Hutton, a brokerage so trusted its slogan became American scripture: “When E.F. Hutton talks, people listen.”
In 1980, Hutton turned that trust into an interest-free credit line.
The scam was simple enough to be beautiful: write a check from Bank A without the money to cover it. Deposit it in Bank B. Write a check from Bank B to cover Bank A. For the few days those checks spent wandering the banking system — a limbo bankers call “the float” — both banks counted the same dollars. Money that existed only in transit. Money that existed, strictly speaking, nowhere.
Hutton rode this carousel for as much as $250 million a day in free, unauthorized loans. One branch cleared an extra $30,000 a month. Eventually, executives responded with the traditional Wall Street compliance procedure.
Excellent. Now, everybody can do it.
Then, in 1981 — the carousel still spinning — President Ronald Reagan reached into Hutton, plucked out John Shad, and made him chairman of the Securities and Exchange Commission.
The man from the building where money was imaginary would now police every building where money was imaginary.
The scheme died the way these schemes always die: somebody small did the math.
In late 1981, Hutton’s four-person office in Batavia, New York, moved its accounts to the Genesee County Bank, a small farm-country bank in western New York. Within nine days, that office had run more than $26 million through its new account — more money than the entire bank possessed.
The bank’s auditors looked at the deposits and asked the fatal question: why is this four-person brokerage office depositing the GDP of Belgium?
The honest math of a small town did what nobody on Wall Street would. It’s those nobodies who often become the heroes.
On May 2, 1985, Hutton pleaded guilty to 2,000 counts of mail and wire fraud. The brokerage firm paid a $2 million fine plus $750,000 for the cost of the investigation. They also agreed to make restitution to the more than 400 banks that it had defrauded. No executive was prosecuted. Nobody went to prison. The Justice Department refused to even release the names of the officials involved. And the plea landed while John Shad was four years into running the agency that regulates Wall Street.
Now, to be fair, there is no evidence that Shad participated in or knew about the scheme. But it began while he was Hutton’s vice chairman and continued for roughly nine months after he became Wall Street’s chief regulator. Fortunately, Hutton’s own hired investigator found that the crimes belonged to middle management, a conclusion of great convenience to everyone above middle management.
Shad would hold his SEC job until June 1987 — the longest tenure in SEC history at the time.
What a Stock Buyback Is, Explained Like You’re Five
A stock buyback is when a company uses its own profits to buy back its own shares from the open market. If that does not immediately sound suspicious to you, let me put it in different terms.
Imagine a restaurant. The owner has a good year. He has a pile of profit sitting in the corporate account. He has three choices for what to do with it: he can raise the wages of his waitstaff, he can buy a new oven and expand the kitchen, or he can use the pile of profit to buy the restaurant back from himself at a higher price.
The last option does nothing for the waitstaff. It does nothing for the customers. It does not build a new kitchen and contribute to the GDP. It does not produce a single useful thing. But the owner’s personal stake in the restaurant just got more valuable because there are now fewer slices of the pie outstanding and his slice is suddenly bigger.
That is a stock buyback.
In 1934, after watching stock manipulation help vaporize the economy, Congress passed the Securities Exchange Act, which treated large-scale share repurchases as market manipulation — the kind that came with criminal exposure. For the next five decades, companies (mostly) didn’t dare.
To run the new agency, FDR appointed Joseph Kennedy — a man who had spent the 1920s running the exact manipulation pools the Act outlawed. When asked why he chose Kennedy, Roosevelt reportedly explained: it takes a thief to catch a thief. The SEC was born with a poacher in the gamekeeper’s chair. It would not be the last time.
For forty-eight years, that threat of prosecution held.
Until November 1982…
A Safe Harbor, If You Can Afford a Boat
In November 1892, John Shad’s SEC adopted a regulation called Rule 10b-18. The rule gave corporations something they had never possessed in quite this prepackaged form: a clearly marked safe harbor from market-manipulation liability when buying back their own shares.
Over time, that safe harbor helped turn the buyback from a legally nervous maneuver into one of American capitalism’s central rituals. The rationale, as economist William Lazonick has documented, was that buybacks would drive up stock prices, benefiting shareholders. This is true in the same sense that letting wolves into the henhouse benefits the digestive systems of the wolves.
And the money moved. In 1980, S&P 500 companies spent $6.6 billion on buybacks. In 2024, companies spent $942.5 billion on buybacks. In 2025, they spent roughly $1 trillion.
That is a trillion dollars a year not going to wages. Not going to research, safer airplanes, or better healthcare. Not going to anything that produces a single useful thing for a single human being, except to inflate stock prices.
Today, the top 10% of Americans own 93% of all household stock-market wealth. The bottom 50% own 1%.
That is the whole game.
The CEO Pay Creep
It might help to remember the boring decade before CEOs made Croesus look frugal. In the 1960s and 70s, CEOs were rich but not absurd. They were rich the way a successful regional dentist is rich. They lived in the towns where their factories were. Their kids went to the same school district as the foremen’s kids. The CEO of a midwestern machine-tool company did not have a yacht with a helicopter pad. He had a slightly nicer house on the same side of town as his plant.
Apparently, this lifestyle did not give them enough distance from the unwashed masses.
Meanwhile, workers enjoyed those boringly productive years. Between 1948 and 1973, American productivity rose by 96.7%. Hourly compensation for the typical worker rose by 91.3%. The economy grew, and the workers got most of it. That sentence is so foreign to a modern American reader that I want you to read it again.
The workers got most of it. So what happened?
In 1965, the average CEO of a major American corporation earned 21 times as much as the typical American worker. Twenty-one. By 1978, that ratio had crept up to 31. In 2024, it was 281. At Walmart, it’s 930.
Some companies are worse than others. In 2024, the median Starbucks worker earned $14,674. CEO Brian Niccol’s compensation was $95.8 million — a ratio of 6,666-to-1 — the widest pay gap in the entire S&P 500. At Starbucks, the median worker would need more than 6,000 years to match the CEO’s one-year compensation. That means they would have to clock in at the Stone Age.
The Second Trick
While buybacks made CEOs richer than Borgia popes, they still hungered for more. A second feast arrived in 1993 in the form of a beautifully well-intentioned policy that exploded in the federal government’s face.
President Clinton campaigned on reining in CEO pay. So his team negotiated a tax rule that said if you pay your CEO more than $1 million in cash salary, the corporation can’t write off the excess for tax purposes.
And that reined in the greed the way a “Please Don’t” sign reins in anything.
The corporations looked at this and said, thank you, this is excellent. Because the rule had an exemption for “performance-based compensation” — meaning stock and stock options. So corporations simply stopped paying their CEOs in cash and started paying them in the very thing buybacks pump up — stocks.
For the next twenty-four years, the machine ran on a taxpayer subsidy. Here is one revolution of the wheel: the CEO sets the policy that authorizes the buyback. The buyback inflates the stock price. The CEO is paid in stock. The CEO cashes out at the inflated price. And the IRS wrote the whole arrangement off because the federal government, in 1993, had helpfully labeled it “performance-based.” For twenty-four years, this is how America pretended it was a meritocracy.
Now, if the tax loophole were really what drove CEO pay into the stratosphere, there would be an easy test: close the loophole and watch pay come back down. As it happens, we ran that exact experiment.
In 2017, Congress repealed the performance-pay exemption. The subsidy died.
And…nothing happened.
CEO pay didn’t drop. By 2024, stock awards and options still made up 79 percent of CEO compensation.
And when you think about it for ten seconds, of course it didn’t drop. The 1993 rule had offered corporations a discount for paying CEOs in stock. Taking away a discount doesn’t hurt anybody — especially when the same 2017 law cut the corporate tax rate from 35 percent to 21 percent, a windfall so large that losing the deduction was a rounding error. Corporations shrugged, wrote off the write-off, and kept the machine running. Because the machine still worked. The buyback still inflated the stock, the CEO was still paid in stock, and the buyback was still perfectly legal.
Remember that, because it matters in Part 3.
Today, CEO pay has grown by 1,094% since 1978, adjusted for inflation, while worker pay has grown by 26% over the same period.
CEO pay grew forty-two times faster than worker pay. This would be a fine example of capitalism if CEO productivity had grown forty-two times faster than worker productivity. But it did not. They are not forty-two times anything except wealthier.
And the reason they are wealthier is that the rules were changed to allow them to extract wealth from the corporations they ostensibly serve—using mechanisms that previously would have carried the threat of a federal manipulation charge.
The Big Club
When you read in The Wall Street Journal that the “skills gap” is why workers can’t get ahead, what they are telling you is that you are not skilled enough to deserve a raise.
What is actually happening is that since 1978, productivity has risen, but the typical worker’s pay has not kept up. The skills are there. The work is being done. The value is being produced. The value is being captured by someone else, and that someone else is sitting in a corner office writing op-eds for The Wall Street Journal about how you should have studied harder.
And when you read that CEO compensation is “the market price for executive talent,” what they are telling you is that there is some objective external mechanism setting these pay levels. What is actually happening is that other CEOs sit on the boards that set these CEOs’ pay, in a self-perpetuating closed loop, using compensation consultants paid by the CEOs to recommend higher CEO pay. There is no market. There is a country club, and the country club has decided that everyone in the country club deserves a raise.
George Carlin famously said, “It’s a big club…and you ain’t in it.” He was not joking. He was describing the mechanism.
The CEO pay gap is not a market outcome. It is a policy outcome. It was made by Wall Street executives — John Shad foremost among them—and was made with Rule 10b-18, which built the machine, and the 1993 deduction loophole, which fueled it. Meanwhile, Citizens United ensured the people enriched by the first two could spend without limit to keep them in place. Every step was deliberate. Every step had a signature on it.
And it can be unmade by the same tools.
There is a bill sitting in Congress right now that would do most of the unmaking. It is not complicated or radical. It uses the same mechanism — the tax code — that built this monster, and it points the mechanism in the opposite direction.
It has been introduced in Congress after Congress. It has been buried every time.
How it works, what it would cost the people who deserve to pay it, and why it cannot get a floor vote in the Senate is the subject of Part 3.
Carlyn Beccia is an award-winning author and illustrator of 13 books. The Grim Historian is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
I totally enjoyed this. It pissed me off, but I enjoyed the way you broke this down.
Brilliant break down of the whole process. Thank you!!