The problem with our markets and economy, as a "capitalistic" society, boils down to the fact that every mechanism set up to avoid failure and disruption (counter to a capitalistic system) has failed. Not only has failure remained in the system, the very features that have been instituted to save us have actually contributed to a slow and methodical breakdown of a system that is supposed to thrive on change. The following is a short list of ideas, institutions or laws previously thought to bring stability to our financial system:
Fannie Mae
Freddie Mac
Circuits breakers
Federal Deposit Insurance Commission
Government seizure of AIG
National Association of Securities Dealers
FINRA
Securities and Exchange Commission
Generally Accepted Accounting Principles
Uptick Rule
Ban on Short Selling
Sarbanes-Oxley (Sarbox)
After all, look at some of these concepts and see what their impact has been. Circuit breaks were instituted after the stock market crash of 1987 to prevent a similar one-day decline of 20%. Since then the only circuit breakers to ever kick in are those that happened during the largest rise in stock market history from 1990 to 2007. On the way down however there is not a peep of a circuit breaker being tripped. The most recent orderly declines have contributed to the largest singular decline in stock market history. Worse still, we don't even know if the carnage is over.
How about the Securities Exchange Commission and FINRA? Out of all the crimes that have been committed on Wall Street the only person to go to jail was Bernard Madoff and his associates. Come on!!! The guy turned himself in...and if it wasn't for the market decline who knows how long the scheme could have gone on. Do you want financial security? Don't rely on the SEC or FINRA to provide it.
As quiet as its kept, one law that keeps being violated but hasn't landed anyone in jail is Sarbanes-Oxley (Sarbox).
What is Sarbox? Oh, that's the law that came out after the Enron and WorldCom accounting and executive frauds of the 1990's. One provision of Sarbox says that executives can't publicly say that their company is financially safe and sound when they knew otherwise. This was a tactic that
Enron executives used to prop their price up while they were selling at the same time. I have heard too many executive from Fannie, Freddie, Lehman, Merrill, B of A, Citi and others do what is a clear violation of the letter and intent of the law. Any of those guys in jail yet? Naw, no one is likely to go to jail for outright lying because if the executive says something to prop the company stock between the quarterly reports but not specifically on the audited quarterly report itself then it's cool. The Sarbox legislation reads like a "how to guide" on ways to avoid getting caught. Either let Skilling and Ebbers go or back the intent of the law and put the most recent offenders in jail.
After the Enron and WorldCom debacle Sarbox was supposed to address the issue of off-balance sheet items. Among other things Sarbox says that it's purpose is:
"...to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities." (emphasis mine)
What about Fannie, Freddie, Citi, and Merrill using off balance sheet entities or
GE using earnings management to cover their losses or produce profits? Is anyone going to stand tall and call these Enronesque tactics out?
· Not likely, whoever has the guts to bringing these issues up would be accused of kicking an opponent while they're down. Unsportsman like conduct would be the charge.
Alright, so what's my beef with FDIC? It sounds like a wholesome institution. After all, it protects the deposits of everyday citizens like you and me, right? Thanks to
James Grant's book
Mr. Market Miscalculates, here is what National City Bank (today's Citigroup) had to say about the legislation bringing FDIC into being:
"The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases."
Now, don't get me wrong, I like keeping my money in an institution that passes on the cost of deposit insurance. However, it is the FDIC protection that allows the banking institutions to run amok when times are good and the public has to pay when times aren’t so exciting. Is there any coincidence that we had the S&L crisis (FSLIC backed) to begin with? Is it any wonder that the costs associated with the S&L crisis are still part of our government's
off-budget items. At the same time we're still paying for the S&L debts, the Resolution Trust Corporation (RTC) is called a success. Prophetically, Citigroup is among the largest offenders of the very system that their forerunner was against and for the very same reasons. There is little wonder the FDIC is petitioning congress for an additional $500 billion backstop "just in case." The FDIC is moral hazard reincarnated. After all, a bank can put a FDIC sticker on their door and have instant credibility as a business and if it fails the FDIC swoops in to legitimize the sticker.
The government seizure of AIG is now a hornets nest. But it never had to be. If we didn't bail out AIG we wouldn't have to worry about bonuses being paid in the first place. The near $10 trillion of bailout money could have gone to better uses like bailing out the FDIC, something that people have expected to be there for over 60 years. Or buying up 90% of all mortgages in the nation...no, no... better still, insuring against any defaulted mortgages up to $10 trillion. By insuring against loss, no money has to go out at all until there is a real, honest to goodness foreclosure. And like every good insurance company, the government could selectively decide to pay up.
The outlandishness of getting rid of these organizations certainly gets folks riled up. How could a simple two-year decline in the stock market and economy call for the dissolution to such important entities? To which I say, show me the evidence that these rules and organizations have done their job. What good comes from letting a company like AIG stay around when so many well run insurance companies are waiting to take their place. Ah, but the common refrain is, "if we let AIG go then the alternative could be worse." Touc.
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