It is bad enough that an insurance company, which should know a thing or two about risk, was so badly run that it needed to have the U.S. government nationalize it to the tune of an $85 billion purchase. But when the White House admits that taxpayers may not even see their money returned, you have to wonder if everyone has become a drunken spendthrift sailor. In answer to the concern that taxpayers may never see the money again, White House Press Secretary Dana Perino responded yesterday: “That’s true.”
Most people are smart enough to get a warranty when they buy a new washing machine. When it’s other people’s money that the Fed can just “print,” as many of its supporters remind those of us concerned about the now $900 billion that has been paid out or committed as a result of the subprime credit disaster, the standard of care appears to be less rigorously observed. And Republican administrations have always claimed to own the playbook on responsible fiscal management.
I suppose they may have caught the same disease as AIG, which, even though it was one of the world’s leading assessors and insurers of risk, still allowed risk to run out of control and drive the company into the ditch. It will be interesting to see whether this latest White House admission that the $85 billion may have just been thrown away will make its way onto the campaign trail and into Congressional hearings.
Only the hapless and accident-prone administration of George W. Bush could make the Chinese and the Russians looks like prudent stewards of the public purse.
Without a shot being fired or a ballot being cast, the United States government has been overtaken by an act of socialism on a scale that is as incomprehensible as it is shocking. Now, in addition to being the world’s largest mortgage backer as a result of its takeover of Fannie Mae and Freddie Mac, the U. S. government is the owner of the world’s largest insurance company following yesterday’s seizure of AIG Insurance. The implications of the $85 billion dollar bailout, which brings the tab (so far) for U.S. government rescues and Fed loan facilties related to the current crisis to be in excess of $900 billion, have not even begun to be considered. This much is clear: Financed by the Federal Reserve, whose head, Ben S. Bernanke, mused last year that the subprime credit crisis would not spread to the larger economy; led by Treasury Secretary Henry M. Paulson, Jr., who proclaimed months ago that “We are closer to the end of this problem than we are to the beginning;” and approved by George W. Bush, the most disconnected and unpopular President in modern U.S. history, the judgment of these players inspires little confidence.
American capitalism has abrupty changed course and headed into waters that may prove far more harrowing than the collapse of even a giant insurance company. Resourceful men and women can always find ways to manage disaster wrought by inattentive executives and directors such as those who drove AIG to the point of disaster. They can rarely survive or prevail when fundamental and guiding principles themselves become the object of disregard and abuse.
*Birthplace of Vladimir llyich Ulyanov (Lenin)
Washington’ s takeover of Fannie Mae and Freddie Mac gained the quick support of Wall Street, who never meets a bailout it doesn’t like, and the thanks of Beijing, whose playbook it seems to be borrowing.
Months after U.S. Treasury Secretary Henry M. Paulson, Jr. reassured the world ‘s markets that “We are closer to the end of this problem than we are to the beginning,” the Bush administration this week seized mortgage giants Fannie Mae and Freddie Mac. With that single act, the United States -long-reputed bastion of free enterprise, and led by the first MBA-trained president ever- undertook the largest nationalization of private enterprise in modern history. It was by far the most striking culmination, at least to date, of the folly, hubris and Titanic misjudgment that has seen Wall Street, boards and regulators take a holiday from risk and reality that can now be measured in trillions of dollars in write-downs, lost shareholder value and the worst economic crisis since the Great Depression.
Like the government-sponsored Bear Stearns rescue that preceded it, this, too, is a bailout that has the fingerprints of Wall Street all over it. Morgan Stanley played a pivotal role in advising Mr. Paulson on how the deal would be orchestrated. In fact, all of the government’s recent interventions have been done in consultation with Wall Street’s biggest firms.
With the stroke of a pen, the decision to place the strangely named pair into a “conservatorship” removes key private sector competitors from the mortgage business that was so lucrative to Wall Street’s top banks and institutions, while at the same time ensuring a steady flow of mortgage funds into the market. Wall Street got what it wanted again, and showed its gratitude by the Dow soaring more than 300 points in the first few minutes of trading after the decision was announced. And the U.S. government is now the biggest mortgage backer in the world.
Reasonable men and women will differ as to whether the bailout of these institutions was wise or not. What cannot be disputed is that it was the result of one of the most costly governance and oversight failures ever.
What brought the U.S government to this remarkable place in the history of its free enterprise system? How was it possible that these two firms were permitted to play such a pivotal role in the economy that their stake in the mortgage market was actually measured in the trillions? How could regulators and boards of directors have failed to such an extent that this mother of all bailouts became necessary?
I doubt that there will be much of an appetite to pursue these questions, which is exactly why, in a culture where accountability and good governance always took second place to short-term greed and self-interest -and that was on a good day- such a calamity happened in the first place.
Over time, investors, investment bankers and executives became incredibly wealthy from Fannie and Freddie. The two CEOs of these firms made more than $30 million last year alone. The financial rewards from these institutions were viewed as the legitimate fruits of a fabled market-driven free enterprise system which, it is claimed, operates best when government stays out of the picture. Naturally, these rewards were privatized. Now that the jig is up, it is claimed by many, including a deafening chorus on Wall Street just fresh from its long running show where it was clamoring for ever lower interest rates from the Fed, that government cash is necessary to clean up the mess and stabilize the market. The losses, which already are counted in the billions, will be socialized. And thanks for thinking about Adam Smith.
The earth did not exactly shake from the howls of outrage heard among defenders of free market capitalism when the takeovers were announced, or from the College of Wall Street cardinals where the vice of hypocrisy rarely evokes the specter of shame. And it is the idea that Wall Street winds up making money from either success or failure, that free enterprise or government bailout is just fine with this crowd as long as the money keeps rolling in, that is the most galling.
It is always a measure of the fundamental strengths of any system of government or economics that the spires of its principles are able to withstand the gales of expediency. Looking at how happily the market embraced this latest government intervention, which occurred on a draconian scale heretofore typically associated with South American dictatorships, the toppled ruins on Wall Street, and in those other places where principles are expected to matter, are not a pretty sight.
The Alice in Wonderland world into which U.S. capitalism has descended, where profits were based on flaky business models, indecipherable investment vehicles and assets held together by thin air, has long had its antecedents in a similarly dysfunctional system of CEO pay. This, too, is a world diverged from reality and common sense, where monster-size bonuses often had nothing whatever to do with performance or outcomes and where fortunes were regularly awarded by boards on the basis of shoddy results, if not outright failure. Is it at all surprising that it was this same system that tempted CEOs to misjudge the prospects of risk and to take actions that were based on how next year’s bonuses would be affected rather than what was in the long-term interests of investors. It is not that far a stretch from a boardroom culture where bonuses were routinely awarded even for poor performance to one that would see a pandemic creation of investment vehicles that proved to be empty in terms of value and risk consideration.
Criminal fraud at the level of Hollinger or Enron, or misfeasance such as was found at Fannie Mae when previous management cooked the books in order to push up their own pay, may not abound throughout corporate America. But the seeds of the folly that is at the center of CEO pay and the disaster it so often heralds may well be viewed by history as having been synonymous with the disconnection of value, values and meaningful governance/oversight that has brought the economy and the American business system to this perilous point in time.
And the price tag for all of the government’s actions over the past year -the Bear Stearns rescue scam (as noted on these pages before, the Fed never really took on the $29 billon loan; it bought the collateral outright), its apparently never closing and endlessly accommodating discount window, and now this latest Wall Street bailout? Nobody seems to know. And few appear to be asking even during a presidential election year. The costs seem likely just to be pushed off in one form or other, whether in the guise of soaring inflation, galloping deficits, higher interest rates or a weaker dollar, to a future generation. The rewards of the government’s latest intrusive efforts will be privatized once more. Their risks and the costs that lie ahead will be socialized again.
One more point of interest: the Fannie and Freddie move was met with approval by countries which hold substantial instruments of U.S. debt, including significant amounts of paper obligations on the part of these financial institutions. China, a totalitarian state that professes communism but increasingly practices capitalism, especially praised the move by the United States, a land which trumpets capitalism but increasingly seems to practice the fine art of socialism.
In the distorted, upside down world that America’s leaders, financial wizards, regulators and directors have created, what pleases Beijing most seems only fitting.
Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster.
It was the kind of deal you might expect to see among business and government cronies in China. A large bank gets into trouble. Another one comes in and is given an exclusive opportunity to buy the good assets at fire sale prices with the state agreeing to take over billions in liabilities. The head of the ruling party gives his blessing to the deal on the advice of the top regime official who, 18 months earlier, headed an investment bank himself.
Except this was not China. It happened on Wall Street, ground zero for free market capitalism, or so it is claimed. JPMorgan struck a sweetheart deal with the Fed in taking over the remains of Bear Stearns. While its demise comes as no great surprise after Friday’s run on the bank, it appears that no other institution was given the opportunity to work out a competing offer or at least one that is supported by the government and the Fed. President George W. Bush and Treasury Secretary Henry M. Paulson, Jr. approved the deal.
At $2 a share and with 7,000 to be laid off, Bear Stearns employees will call it a betrayal. The firm’s top management and inside directors, after all, have made hundreds of millions in compensation and bonuses in the past few years and it would not be surprising if arrangements have been made for some to walk away with a tidy severance/change of control package. JPMorgan will call it a good buy. Still others will call it a bailout that gives a level of comfort to the financial sector which otherwise might not prevail and may not be deserved. But in truth, this deal is hypocrisy on stilts.
When it comes to the wave of titanic bonuses, platinum parachutes and multimillion-dollar pensions for its CEOs that have swept across Wall Street and elsewhere in business, America is told it is the free market that sets the rates. Boards are merely responding to these larger economic forces over which they have no control. The same is said about enforcing provisions of the Sarbanes-Oxley Act, the Enron era package of reforms which corporate luminaries have argued overly restricts American capital and makes it tougher to compete. But when it comes to dealing with the mistakes and misjudgments of those CEOs and boards, it is government that Wall Street and others call on to intervene and save the day. The supreme, or perhaps subprime, irony, of course, is that the same financial institutions that created the problems with their overly complex and exotic investment vehicles which they themselves did not fully comprehend and cannot today accurately value are demanding relief from the Fed and anywhere else they can find it.
Ironic, too, is the fact that Americans, as consumers, investors and members of pension plans, are the ones who actually pay for the monster compensation that has come to symbolize the modern boardroom. And when the lure of great rewards prompts CEOs and boards to take risks that later prove calamitous, as the subprime fiasco demonstrates, it is the American taxpayer who is asked to pay again through the inflation-creating printing of money or the taking on of more public debt. There are many unanswered questions concerning the implications of what the Fed and the White House have sanctioned in the Bear Stearns bailout, and in the larger issue of exactly how much is being committed to prop up other financial institutions -and at what cost.
Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster. They are entitled to more than being relegated to the position of prisoners of irony conveniently contrived by corporate and public leaders, while being stuck with a multibillion-dollar price tag for the privilege.
Less than a year ago, Treasury Secretary Henry M. Paulson, Jr. was giving a lot of support to efforts that were designed to loosen business regulation and Sarbanes-Oxley reforms. We had some thoughts on the subject at the time. Fresh from the top post at Goldman Sachs and on the job for only a few months, the Secretary noted:
A consequence of our regulatory structure is an ever-expanding rulebook in which multiple regulators impose rule upon rule upon rule. Unless we carefully consider the cost/benefit tradeoff implicit in these rules, there is a danger of creating a thicket of regulation that impedes competitiveness.
Today, Secretary Paulson called for a tightening of rules in a whole range of market areas and indicated that new regulations are on the way. Meltdowns in the housing market and downturns in the economy that get people thinking about the 1930s, and where weak oversight and unfettered risk creation were major contributors to the turmoil, have a tendency to do that. In his speech, Mr. Paulson observed:
We must have better policies, processes and mechanisms to understand and manage complexity, to discourage its excess, and to better understand and manage risk.
It’s amazing how different the world looks when the perspective shifts from what’s good for Wall Street to what’s needed on Main Street.
They’re at it again. They have opposed every progressive move society has widely demanded, from the minimum wage to the first environmental regulations. They lobbied against car safety laws in the 60s and consumer protection legislation in the 70s. They had nothing at all to say as corporate greed and boardroom crime were claiming company after company beginning with Enron (and continuing today with Hollinger) and then dismissed it all as being nothing more than a few rotten apples in the barrel. Some apples; some barrel, as Sir Winston might have said. (more…)
