February 25, 2009
For as many years as I can remember, I heard dozens of arguments for & against regulation. Of the many things I’ve forgotten over those years, there’s one thing I do remember; I once agreed that, as a free market, government should not be micro-managing our markets and corporations via regulation. Of course, like so many others during that time, I never dreamed we would be facing what we are today, more specifically, the cause.
The frontline problem we have is with the enforcement of regulation. Before we rewrite our regulations, which has to be done, there are two things that’s a must; people with proper moral values who can not be bought off and/or influenced by the industry they are overseeing (naturally, ideology must also be absent), and a zero tolerance of lobbying lawmakers for laws that circumvent regulations. Only then will regulation have a chance.
Having pointed out the above, strict regulations and strong enforced has to be implemented and is non-negotiable; the future of a free America depends on it. Those that have witnessed the result of the past decade or so and still lobby for little or no regulation is either living in a self-induced coma or in complete denial. Our corporate executives have proven beyond a shadow of a doubt they will not control themselves, left to their own vices.
Regulating The Unregulated – Greed
Along with identifying the kind of people we need as overseers, enforcers, and keepers of our money (all covered below), we have to start with new written regulations. At the very top of that list is something I have often referred to as the root cause of the current crisis; greed. It wasn’t the housing market that caused the crisis. It was caused first by the greed of the money lenders, then greed by consumers. However, without the money lenders greed, the consumer couldn’t have exploited their own greed. So we start at the top, and that is controlling the executives at our financial institutions.
Executive pay packages must be addressed; and that’s total package. To begin with, the compensation lawyers & negotiators are to be fired; no more “suits of armor” allowed for executives. Then whatever contract is signed, any pay above & beyond base pay must be tied totally to company performance; long term sustainable performance. No exceptions. Believe it or not, Henry Paulson left word with the Obama administration that new banking regulators should have a major say in compensations. In fact, the same article points out how Paulson had a huge “change of heart” during his tenure as treasury secretary of what roll government should play in the banking and finance industry. Funny how people get ‘religion’ once their run is over, including these fund managers who say they need to be regulated.
Executive pay & greed has been so written about, I feel it’s useless to go into any details. However, the following is a list of articles I had filed away in support of this post. You might find them interesting.
Wall Street’s Brain Drain Defense by David Gillen for The New York Times. Gillen talks about the business of capping executive pay, which many say will “drain the brains” away from Wall Street. But Gillen says that’s just a defense for self-justification. He questions whether pay caps will really run these people off, and if it did, do we really care; do we want these same kinds of people running our banking systems. (Look. John J. Mack, Morgan Stanley CEO, told the House Financial Services Committee “if we had no bonuses, we would love it“, meaning their jobs. I say it’s time to find out.)
After Huge Losses, a Move to Reclaim Executives’ Pay by Gretchen Morgenson for the New York Times. Morgenson ask the question “should executives get to keep lavish pay packages when the profits that generated their compensation go up in smoke”?
The Color of Money: Passing the Buck by Michelle Singletary for the Washington Post. In this article, Singletary talks about the “sacrifices” of CEO’s who decide to “slash” their salary to just $1 a year.
The Value of ‘Other People’s Money’ by Melvin I. Urofsky for the New York Times. Urofsky opens his piece talking about the cause of the 1929 stock market crash and the ensuing depression. He refers to Louis D. Brandeis’ book “Other People’s Money, and How the Bankers Use It”. Of course, the main character in the book was JP Morgan himself, probably the biggest bank crook of all time. In a nut shell, Urofsky is saying what caused the 1929 fiasco is the same thing that happened this time around; too much power and greed. By the way, today the name JP Morgan is a symbol of Wall Street pride. That should tell us something about them.
Learning How To Count
Accounting standards. Ahhhh, the good ol’ reliable accounting standards. The magic pen & pencil; fuzzy math; slight of hand; now you see it, now you don’t; betting on the come – just a few definitions of one of the now best known accounting standards, “mark to market”. There are many more.
Several years ago I jotted down a note to my self about the modern day CEO. What I said was that in the “good old days” a CEO was CEO for 20 years or more, which meant he would be around to be held accountable for his actions & face the music. But today, most CEO’s are around for only 3-5 years, meaning he/she has got their rewards and long gone by the time the results of their decisions are in, hence, no accountability.
When company executives make the decision to use any accounting standard other than straight up-out front standards, the only thing at work there is an attempt to hide something; profits, or the lack thereof. Now there are various reasons to want to hide the first, such as avoiding taxes, paying stock dividends, repaying investors, etc. But here, it is to hide the lack of profits. Or better put, make profits look much bigger than they really are. And why would one want to do that? To get a bigger pay check. No other logical reason can be explained.
And we have to set our own accounting standards, not rely on the IASB (International Accounting Standards Board). Take the case of Deutsche Bank. Last year the IASB changed the accounting rules so European banks could make their balance sheets look better. The results were that Deutsche Bank was able to shift a $32 billion troubled asset, which converted a loss of $970 million into a profit of $120 million. The ISAB claims they had to make the change due to political pressure, something we have to find a way to avoid.
The Primary Target
Now we get down to the heart of the problem. With proper oversight and enforcement, the Bernie Madoff crimes and those that have surfaced since him could have been avoided. The SEC was warned about possible fraud by Madoff as early as 1999. Although Madoff could still have pulled off a mini-crime (by comparison) under existing regulations, especially considering the ‘regulation end-run laws’ provided by our lawmakers, it would have been much less severe with proper oversight & enforcement. In addition, with proper oversight & enforcement, the events that led to the overall crisis would have been less severe, thus minimizing the depth of the crisis. Ideology played a big part in the lack of enforcement, as was revealed by Harry Markopolos. Thus the reason for putting the right people in place to police the industry.
IndyMac Bank is another good place to look for an example of lack of enforcement. Regulators allowed the bank to falsify its reports. A senior federal banking regulator, Darrell W. Dochow, approved a plan to exaggerate the banks financial condition. Two months later the bank failed. Dochow was from the Office of Thrift Supervision, which had a history of doing the same thing with other banks. Even with the knowledge the banks were failing, the OTS was still preaching deregulation.
Fannie Mae and Freddie Mac problems were so glaring that a blind man could have seen it. In actuality, regulators did see it. Internal documents were revealed to regulators after senior executives turned their noses up at the warnings, yet the regulators did nothing. And even after billions of taxpayer dollars were blindly handed over to those same Wall Street executives and Fannie & Freddie, there was still no oversight as this report and this one points out. That was nothing but a thumbing of the nose, as Congress had attached a condition to the bailout bill that said there must be an independent oversight committee to monitor the bailout activity. Again, ideology at work.
In addition to oversight and enforcement, some other rules must be in place that assures that those who want to participate in risky investments must have a fair stake in the risk. Syndicated Loans is a good place to start. These are loans that are usually not high quality loans but originators can easily sell them off. Once sold, the loans never get monitored. The lucrativeness to the loan originator is that they, the originators, end up with little or no skin in the game, so they have almost nothing to loose once these loans become syndicated. So we must have regulations that say anyone in the chain of loans must have & keep a fair share invested.
Another piece of regulation that must be put together is limiting just how big these firms can become. Over and over, during the past few months, we have heard the old reliable standby defense, “they’re too big to fail”. Obviously, the definition of how big is too big can be argued. But when we allow a financial organization to expand into every aspect of the industry, you are asking for trouble. So limitation can start there. Take a look at AIG; was there a single area of “collecting & handling money” they were not in? Then we should limit their investments against a measurable yard stick. I’m quite sure there are those a lot smarter than I that could tell us in a minute how to effectively limit the size of a business yet keep them viable.
Finally, to protect the taxpayers in the future, our lawmakers should pass irreversible & un-amendable laws on what the government is allowed to do in these cases; in other words, remove the taxpayer safety net from these criminals. And if those new laws does give the government some latitude to get involved, strict irreversible laws must be passed on the rules recipients’ of financial help must follow.
Putting The Right People In Place
Simultaneously with regulation, some basic ground rules must be established and passed into law in such a way that it will be practically impossible to reverse. This goes back to my previous point of putting the right people in key positions. Henry Paulson, previous Secretary of Treasury, came from the ranks of those on Wall Street. Paulson was Chairman and CEO of Goldman Sachs before becoming treasury secretary under Bush II. When the financial crisis hit last fall the first thing Paulson did was formulate the biggest scare tactic in our history, short of a war, and he knew he had a friend in the White House to help him sell it. The whole idea was for Paulson to save his closest friends who resided on Wall Street. Joel Kotkin, in a piece for Forbes, called it “the Paulson principle: in bad times, steer help to those least in need“. Now we have a new treasury secretary, Timothy Geithner, serving under President Obama. Geithner’s background didn’t come from the so-called private sector, but he had been in the banking system most of his career. And, he did play a role in handing out lots of money to Wall Street executives last year. Then there is Robert E. Rubin. He was with Goldman Sachs for 26 years, after which he served in the Clinton administration. Afterwards, Rubin served on the board at Citigroup, which is where he was when Citigroup went broke and had to be rescued by Paulson in the $700 billion bailout. No one has ever denied the fact that Rubin helped steer the bailout from inside Citigroup. David Cho and Neil Irwin, staff writers at the Washington Post, co-wrote a piece last November they entitled “Familiar Trio at Heart of Citi Bailout; Rubin, Paulson, Geithner’s Shared History Paved Way for $300 Billion Federal Guarantee“. In it the two detail the trio’s relationship and their roll in the rescue of Citigroup. And, of course, we can not forget Paulson’s right hand man and ex-Goldman Sachs pal, Neel Kashkari. He was the point man in overseeing the $700 billion dollar bailout.
The aforementioned are the kind of people that has to be barred from government service in the area of banking, oversight, and enforcement. If not, then future administrations are going to appoint people who will enforce the administrations ideology, not what’s good for the country. Sure, we need people who understand finance, but we have thousands of experts with no ties to corporations and ideology. They are the ones needed in jobs such as Secretary of Treasury, head of the Federal Reserve (including Board members at the Federal Reserve), Securities and Exchange Commission, Office of Thrift Supervision, etc. So plugging these huge gaps has to be at the forefront if we expect regulation of any kind to work.
Mary Schapiro, the new head of the Securities and Exchange Commission, says she will pursue tougher enforcement. We’ll see. But until she has proven herself effective, I have strong doubts she will do what she says. However, almost anything she does toward actual enforcement will be better than what we’ve had, so from that starting point, just a small fragment of enforcement and she will have lived up to her promise.
The Ultimate Reason For Strong Regulation & Enforcement
It’s very simple. $8 trillion; the total amount (for now) that is slated to be spent on this mess. More than $27,000 for each man, woman and child in the United States. If you are married with two children, your family’s share is about $110.000. But what the hell; it’s only play money, right? You’ll never be around when the balloon payment comes due. So for now, let’s just keep playing our ideology game and arguing with one another about whose political party is our savior and whose is the Satanist. That’s what’s really important anyway!