Companies “Too Big To Fail” Should Be Illegal

25 11 2008

In this, the land of eternally capitalistic motivations, companies have learned that to be dominant, or at least competitive, it’s better to be big. Big gives you economies of scale. Big means you’ve bought up your competitors and, by default, now command more market share. Big apparently also means that you are unnaturally immune to the detrimental aspects of taking extreme risks or incompetent management.

Yes, today the new corporate nirvana is reached when your company has been deemed to be too big to fail (TBTF).

Looking at the current economy and the behemoth players flailing for rescue I understand the mutual benefit that necessitates saving them. We as a country cannot function without their continued existence. I get it. I understand we are backed into a corner on this and that we (and of course by “we” I mean our government) must save these companies from their own excessive greed and criminal negligence.

However, if a company has been deemed “too big to fail” and we are required to rescue it I would like to suggest the application of one of two mandates.

  1. Any TBTF company receiving government bailout money must be divided into two or more smaller economically non-critical corporations.
  2. If it is not feasible to divide the TBTF company then it is apparent that the company in question has grown so large that it can no longer assume ultimate responsibility for its own actions. Since that responsibility by default falls onto the shoulders of the American public such a super critical company must, by necessity, become a part of the federal government.

These sort of sanctions would solve the TBTF problem but would also serve to act as a deterrent to companies (*cough* auto industry *cough*) from looking for free handouts just because the government looks like it’s in a giving mood.  Additionally all government regulatory bodies that review corporate mergers (like the FDIC, FCC, FTC, SEC, etc.) be required to consider future deals with the TBTF test in mind.

Maintaining healthy competition among equals would go a long way towards strengthening our economy and would inspire new innovations. It would also encourage companies that feel they are above the laws of capitalism to rethink the risks they assume knowing now that if they fail their company will be divided or absorbed into the federal government.

What do you think? Do you have a better idea?

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How Many “Hail Mary”s Is This Going To Cost Me?

25 11 2008

Hey old man!

The bad news: if there’s a hell you’ve got a first class ticket to it.

The good news: there isn’t and that was freaking hilarious!





Chicken Little Or Nostradamus?

25 11 2008

Peter Schiff made numerous appearances on Fox news and it’s astonishing to watch his spot on analysis so glibly dismissed by the conservative cheerleaders.  I don’t suppose Fox will go back and highlight how right he was and how wrong their people were.  Seriously, this is pretty amazing to watch.

PS: Ben Stein, you’re a pompus self important ass pustule.





Eliot Spitzer On Deregulation and the Best Way to Keep Financial Markets in Check

18 11 2008

For those of you who think deregulation is the best way to go (yes, I’m looking at you Phil Gramm) I think a little lecture from “the Enforcer” is in order.

Originally in the Washington Post Sunday, November 16, 2008; Page B01

President-elect Barack Obama will soon face the extraordinary task of saving capitalism from its own excesses, much as Franklin D. Roosevelt had to do 76 years ago. Up until this point in the crisis, policymakers have appropriately applied the rules of triage — Band-Aids and tourniquets, then radical surgery — to keep the global financial system alive. Capital infusions, bailouts, mega-mergers, government guarantees of unimaginable proportions — all have been sought and supported by officials and corporate chief executives who had until now opposed any government participation in the marketplace. But put aside for the moment the ideological cartwheel we have seen and look at the big picture: The rules of modern capitalism have been re-written before our eyes.

The new president’s team must soon get to the root causes of the mistakes that have brought us to the economic precipice. Yes, we have all derided the explosion of leverage, the failure to regulate derivatives, the flood of subprime lending that was bound to default and the excesses of CEO compensation. But these are all mere manifestations of three deeper structural problems that require greater attention: misconceptions about what a “free market” really is, a continuing breakdown in corporate governance and an antiquated and incoherent federal financial regulatory framework.

First, we must confront head-on the pervasive misunderstanding of what constitutes a “free market.” For long stretches of the past 30 years, too many Americans fell prey to the ideology that a free market requires nearly complete deregulation of banks and other financial institutions and a government with a hands-off approach to enforcement. “We can regulate ourselves,” the mantra went.

Those of us who raised red flags about this were scoffed at for failing to understand or even believe in “the market.” During my tenure as New York state attorney general, my colleagues and I sought to require investment banking analysts to provide their clients with unbiased recommendations, devoid of undisclosed and structural conflicts. But powerful voices with heavily vested interests accused us of meddling in the market.

When my office, along with the Department of Justice, warned that some of American International Group’s reinsurance transactions were little more than efforts to create the false impression of extra capital on the company’s balance sheet, we were jeered at for attacking one of the nation’s great insurance companies, which surely knew how to balance risk and reward.

And when the attorneys general of all 50 states sought to investigate subprime lending, believing that some lending practices might be toxic, we were blocked by a coalition of the major banks and the Bush administration, which invoked a rarely used statute to preempt the states’ ability to probe. The administration claimed that it had the situation under control and that our inquiry was unnecessary.

Time and again, whether at the state level, in Congress or at the Securities and Exchange Commission under Bill Donaldson, those who tried to enforce the basic principles that would allow the market to survive were told that the “invisible hand” of the market and self-regulation could handle the task alone.

The reality is that unregulated competition drives corporate behavior and risk-taking to unacceptable levels. This is simply one of the ways in which some market participants try to gain a competitive advantage. As one lawyer for a company charged with malfeasance stated in a meeting in my office (amazingly, this was intended as a winning defense): “You’re right about our behavior, but we’re not as bad as our competitors.”

No major market problem has been resolved through self-regulation, because individual competitive behavior doesn’t concern itself with the larger market. Individual actors care only about performing better than the next guy, doing whatever is permitted — or will go undetected. Look at the major bubbles and market crises. Long-Term Capital Management, Enron, the subprime lending scandals: All are classic demonstrations of the bitter reality that greed, not self-discipline, rules where unfettered behavior is allowed.

Those who truly understand economics, as did Adam Smith, do not preach an absence of government participation. A market doesn’t exist in a vacuum. Rather, a market is a product of laws, rules and enforcement. It needs transparency, capital requirements and fidelity to fiduciary duty. The alternative, as we are seeing, is anarchy.

One of the great advantages U.S. capital markets have enjoyed over the decades has been the view — held worldwide — that there was an underlying integrity to the representations market participants made, because the regulatory framework in which they were made was believed to provide genuine oversight. But as we all know, the laws requiring such integrity are meaningless without a government dedicated to enforcing them.

Second, our corporate governance system has failed. We need to reexamine each of the links in its chain. Boards of directors, compensation and audit committees, the trio of facilitators (lawyers, investment bankers and auditors) whose job it is to create the impression of legal compliance, and shareholders themselves — all abdicated their responsibilities.

Institutional shareholders, in particular mutual funds, pension funds and endowments, must reengage in corporate governance. Over the past decade, arguably the sole challenge to corporate mismanagement and poor corporate strategies has come from private-equity firms or activist hedge funds. These firms were among the few shareholders or pools of capital willing to purchase and revamp encrusted corporate machines. So it shouldn’t be surprising that the corporate world has taken a skeptical view of them — especially short-selling hedge funds, which have often been a rare voice raising the alarm.

Boards of directors were also missing in action over the past decade; not only did they not provide answers, they all too often failed even to ask the appropriate questions. And the roles of compensation committees, of course, must be totally rethought. No longer can Garrison Keillor’s brilliant observation about our kids — that they are all above average — apply to CEOs and propel failed leaders’ paychecks through the roof. Today’s momentary public oversight and outrage over executive compensation, while long overdue, is no substitute over the long term for firm standards set by compensation committees and boards of directors.
Finally, we need to completely overhaul the federal financial regulatory framework.

Let’s leave aside the ideological hesitancy that has long hamstrung regulatory agencies. Today’s balkanized regulatory framework for financial services no longer matches in any way the needs of a fully integrated global financial system. The divisions of the past — commercial banking vs. investment banking vs. insurance vs. hedge funds vs. private equity — have become distinctions without a difference. But these old boxes and formalities still determine how entities are viewed and regulated. It should surprise nobody that capital found the crevices in the regulatory framework. That is what capital is paid to do. But we failed to respond with a regulatory framework flexible enough to plug the leaks.

We do not need additional fragmented areas of federal regulation to handle hedge funds, sovereign wealth funds or derivatives. We need a unified approach that addresses the underlying issues: what kinds of leverage we wish to tolerate, how to measure risk, how much disclosure various trading products should provide. We cannot survive with the current system: the SEC, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Fed, the Office of Thrift Supervision and on and on. We must go from the Rube Goldberg structure we now have to a sleek iPod design that is cleaner, has better operating software and may even look good.

We began to try to craft such a unified model in New York, as did Treasury Secretary Henry M. Paulson Jr. in Washington last year. But it is urgent that we finish the job. Having flooded the market with cash and seen the government take a chunk of many of our largest financial institutions, we now need to craft the rules that will apply to all market participants.

Three overarching priorities should guide government actions in the new structure. First, we need better control of systemic risk. The currently splintered federal regulatory authority, the continued presence of off-balance-sheet transactions for financial entities (even post-Enron) and the failure to subject major players to any government oversight means that nobody can really understand the full risk facing the financial system.

Second, investors must be protected with adequate, accurate information. Firms must offer transparency both to individual investors and to government regulators.

And third, as Eric R. Dinallo, the superintendent of the New York State Insurance Department, has wisely pointed out, we will have to step back from the current environment in which government has become a guarantor of all major risk. The so-called moral hazard will serve to devalue risk in the market, and this too will have a debilitating long-term effect on capital flows. Only if private actors have to bear the real risks they incur will the market function properly. We are now perilously close to nationalizing risk.

As the rules of modern capitalism are rewritten over the next year, those who benefit from the enormous flow of cash being spread throughout the U.S. economy must be expected to compete within a system of rules that creates a true market — based on sound, skilled regulation, vigorous corporate governance and transparency.

Although mistakes I made in my private life now prevent me from participating in these issues as I have in the past, I very much hope and expect that President Obama and his new administration will have the strength and wisdom to do again what FDR did.

Eliot L. Spitzer was governor of New York from 2007-08 and state attorney general from 1999-2006.





New And Improved!

17 11 2008

As we gear up to clean up the mess left by President WorstEver I’ve been also basking in the afterglow of the election of President Elect Hopeful.  I’m sure I will still be railing against the never ending fount of political stupidity but I thought it would be refreshing to get back to Super Jesus blogging basics and just smack my favorite bitch religion around a little this morning.  Nothing too strenuous since it’s been a while, just a little video to stretch my atrophied muscles.  Ah yes, it’s good to be back.





Banks Allocate 86% ($108B) Of Bailout Towards Compensation And Bonuses!

9 11 2008

Amazingly my ongoing outrage at the Republican party has been outdone by my new found rage towards the heads of the banking industry.  I just read a letter the honorable Henry Waxman sent to the CEO of Wells Fargo where he chastises him and eight other banks for putting $108 billion of the currently allocated $125 billion tax payer bailout dollars towards compensation and bonuses.

This is so reprehensible as to defy credulity.  If there were calls for regulation and oversight before I think it is clear that there should now be calls for the seizure of all personal assets, arrests, and imprisonment for these cowards and honorless thieves.

All of Al Qaeda’s attempts to wound this country combined pale in comparison to the damage the US has suffered at the hands of these craven traitors.  I would stop short of the death penalty only because I want these tender pampered racketeers to spend the rest of their lives in Guantanamo getting the best Dick Cheney has to offer because they are domestic terrorists of the highest order and deserve no less.

(hat tip to Driftglass for the initial point to the Waxman letter)





One Other Thing

7 11 2008

You know my last post where the republicans are finally fessing up to what an incompetent douche’ Sarah Palin really is?  Yeah, well we liberals have a little confession to make too.

Sorry about that, but it really feels good to come clean like that.  I suppose we’re even now, right?  Right?