I actually have a serious post ready to go, but it’s serious enough to not want it posted on April Fool’s Day since I don’t want the slightest doubt about whether or not I am really serious. Look for A MESSAGE TO THE RICH before the weekend.
[UPDATE: There is a chance that A MESSAGE TO THE RICH will also run simultaneously elsewhere... I'm holding it for another day or two until I get an answer]
Until then, I have a few thoughts – questions, really – that might be used to stimulate some comments.
As usual, I have learned a great deal from the comments – especially regarding TONE DEAF. I was not aware – and I try to keep my ear close to the ground – of just how unfair an attack on the current AIG staff seems, given that (unknown to me previously) these are not in fact the same people that destroyed the company, but rather those hired to try and save it and who are sacrificing a lot to do so.
The fact that this is not common knowledge, even to someone with very good access to alternative media sources, tells me two things. First, I am again stunned at how one-sided the media coverage is, and second, I need to find a way to stop being stunned at how biased the news coverage is.
But the central fact remains: somehow a company was run into the kind of bankruptcy that requires a massive federal bailout. Somehow, a combination of government intervention into the marketplace, coupled with some of the very poor decision making and risk assessment that drives all bubble markets, sent the greatest wealth creation engine in the history of the world into a state of near ruin… not from the economic costs, which, though painful, could have been corrected by the operation of market forces. No, this failure was monumental enough to enable the election of the kind of government we have seen perhaps only once before, with the New Deal, and perhaps never before in the history of this nation. This government intervention will not resolve itself, as do all market corrections. This kudzu may never be cleared away.
So my question is, not who, but rather what has failed here?
My first thought is that the Boards of Directors have failed. My understanding is that the entire purpose of having a Board of Directors was to act as a circuit-breaker on irrational or overly-risky behavior. I have NO PROBLEM WHATSOVER with a successful CEO taking tens of millions of dollars in compensation… as long as that compensation is based on success. But for executives to be rewarded with millions in bonuses for driving their companies into bankruptcy? Where the hell are the Boards in all this? Who authorizes these rewards for failure? I expect the government to reward failure. I expected better from businessmen.
That’s the small picture.
The big picture seems to be this: over time, certain companies have grown so powerful, and have become so entwined in campaign donations, that they have been able to achieve a symbiosis with what should be their natural enemies: the government. It is this intersection of the public and the private that seems to have gotten us into this mess wherever we look.
Where large corporations have enough influence to achieve government subsidies, or guarantees that void the risk/reward relationship, bad things seem to happen – very bad things. Not the least of these is the fact that these subsidized giants use those subsidies as an unfair competitive advantage over newer, smaller, lighter companies that in the normal scheme of things would eventually have taken over their market share by providing better products at lower prices.
The meta-picture seems to be this: if capitalism does not police itself, it will be policed by people to whom policing is not a bug but a feature. Ask Wall Street traders if they would prefer to work in a world without regulation and they will recoil in horror. You can’t play any game without rules.
Somehow – and I know it has to do with this unholy union between government and commerce – the rules went by the board, and sound judgment, too. How many small banks went against the tide of profits and refused these debt derivatives as unsound, and therefore remain sound today? How did they manage to make wise decisions, while the biggest and – just ask them – brightest minds dove into this rabbit hole?
I am thinking deeply that it has to do with a fundamental morality. But the fact is, I simply don’t know. What do you think?
What do I think? I feel like the invisible pony in a room full of horses—, Bill. I have no clue who is to blame, but I do appreciate this idea that you and others have, which is to roll up our sleeves and start fixing it. I don’t want to see the government fix it for us, even though that appears to be what’s happening. I would rather have contributed to a privately-managed firm that was buying up all these failing banks than see my money go to pay for the Chris Dodd Center for the Art of Screwing People or the Edward Kennedy Institute for Advanced Pork Studies.
I have served on several Boards. Some non-profit, some public, some private. There is a temptation to assume that the Board is in control, that the ED or CEO serves at the pleasure… blah blah…. Not so. Members are generally well connected, from within, or part of the Corporate fabric and culture. Even if from different backgrounds, it is unlikely the Board will provide much more than a vision, a “general plan” consistent with the working plan of today. Mostly conservative, and reluctant to lead, except as a group. it is the CEO or Executive Director who is expected to provide the ever present leadership, guidance and “glue” to keep the structure moving. It isn’t much different from American governance, “leaders” are elected to execute the “Power” as shaped by those with “Influence”.
I think the financial markets are like a freight train. Their engine drives them forward relentlessly toward profits. The problem we have is that government laid the tracks toward the edge of the grand canyon then turned all the caution lights green.
The train proved about as good at canyon jumping as Evil Knievel so the government is desperately trying the build a bridge.
The engineers of this train certainly chose to go full throttle toward that cliff and are not without blame.
/end tortured metaphore.
Rules are not rules when they are not enforced, and rules aren’t really rules when they are “selectively” enforced—then its just a shell game where the mark has no hope whatsoever of winning.
The cure? Burning a crooked referee alive and making the other referees watch.
Greed. All the boards I have served on were very well policed by very intelligent business men and women. This should never have happened.
I’ll offer, without the slightest shred of proof, the following tinfoil hat theory:
all of this executive compensation has been a way of moving large amounts of capital off the books, so that CEOs can do the bidding of the boards and give the money to lobbyists to curry favor with Congresscrooks.
Bill,
I think you’ve cut straight to the most basic level of the problem with “fundamental morality”.
There was a time when a man considered it his responsibility to police not only his own honorable conduct but also his associations with others based on their honorable conduct (understanding that, under the bright light of day, everything reflects onto everything else) – when a man’s personal integrity was the bedrock of all of his dealings, business or otherwise, and who he allowed himself to be associated with was every bit as important to his personal standing in society, as well as his ease-of-dealings in business.
Once, there really were Captains of Industry who made multi-million dollar deals and trusted their fortunes to steady eye-contact and a firm handshake.
As simple trust and personal responsibility have lost a war of attrition to a victim/entitlement social mentality, the inherent requirement of a man to maintain his personal image of honorable integrity has been smothered under layer upon layer of contract text, Non-Disclosure-Agreements and Confidentiality language.
One of my favorite maxims remains: “Character is what you do when you think no one is looking.”
Our ‘Leadership’ – both in business and government – has had that truth bred out of them over decades by virtue of having become so legally insulated from the consequences of their own decisions and actions that they know with a nearly iron-clad certainty that, except under the most narrow set of circumstances, no one will ever be ‘looking’.
Once the currency of business was allowed to shift from “Reputation” and “Personal-Integrity” to leverage-able credit and one’s relative ability to obstruct the business of others…
…where else was this all going to go?
Everything else can be extrapolated from there.
– MuscleDaddy
To a certain extent, Wall Street’s greatest successes were the catalyst for this mess. Selling stock is so easy and friction-free that if the owners of a company (e.g. the shareholders) are unhappy with the performance of the CEO or the Board, it’s far easier to just sell that stock than fire Management. Plus when you consider how many shares are held by fund managers who absolutely do not want anything to do with management shakeups, and you have a situation where CEOs and captive Boards are mostly immune from investor wrath. Until things get bad enough that the firm can be bought out, the lackluster CEO is safe (and even then he probably has s golden parachute). If he’s managed to make the company toxic enough, nobody’s going to buy it anyway.
So the CEO and Board drain the company dry and run it into the ground, and nothing really stops them.
Another factor has been the disgracefull behavior of elected politicians, espeically the State AGs in the Northeast. The AGs of the two major financial states, CT and NY, have been using their offices as publicity machines for at least a decade. Blumenthal from CT and first Spitzer then Cuomo the Younger from NY have been glory hounds, not sober prosecutors. They’ve been sing their powers of investigation, indictment and subpoena to blackmail, extort and bully high-profile companies and individuals into helping them further their political ambitions. Spitzer in particular bears a good chunk of responsibility for the AIG mess since he chased AIGs founder out with trumped up baloney charges. It was the people who came after him that green-lighted the reckless behavior that ruined AIG.
When the authorities launch investigations based on the publicity value of the target rather than on actual corruption, good people get the message and leave the industry because they know responsible honorable behavior won’t protect them from being assaulted by the local Aspiring Governor. Less honorable people move in, figuring they’ve got a chance to make a killing and get out before they get caught.
Get money out of your politics and you’ll solve a lot of problems..
First, it is the responsibility of the board to hire the operational leaders (CEO, COO, CFO, etc.). They are the ones who determine the compensation package. So far, so good. The problem rapidly goes of the track because of the twins of greed and fear. Greed is obvious. The fear is that if they don’t create a sweet enough package, the might not get this world class superstar executive, and the company will languish. Exactly the same psychology that causes MLB teams to pay tens of millions for a player with a career batting average below .230. “If I don’t pay him what he wants, the next company will, and we will be doomed.” Hogwash. Except for a few giants like Carnegie, Rockefellar, Morgan, Welch, Jobs or Gates, there is not that wide a range of talent at the C wing level. Getting the 20th draft pick will not be a game breaker compared to the 10th draft pick. Boards have to take responsibility and respond to unreasonable compensation demands with a simple, “Next.”
Bill,
In today’s “Age of the Common Man” (spit!) it has become the fashionable view that l’aissez-faire capitalism is too rapacious to be allowed to operate without the benevolent hand of government moderating it’s worst aspects.
Now it is laid bare for all who are willing to see that this benevolent moderation has morphed into an all encompassing leviathan of corruption, special interest, and politics.
Tampering with the market, even when the “goal” is laudable will always, inevitably, produce unintended consequences that will eventually destroy both the free market and it’s regulators. Like individual people, markets thrive when they are the most free.
You are correct that it is a moral issue. Capitalism is trading goods and services. Both sides percieve value in the trade so it is done freely. Taxes, regulations, subsidies all usurp a measure of this freedom. To that extent they are immoral.
we cant have it both ways. It is either free markets or central planning. Cobbled together Frankenstein policies can only endure for a short time before they lurch out of control and cause more harm than good.
The medieval guild system failed, mercantilism failed, Napoleon’s “Continental” system failed. Only l’aissez-faire capitalism flourished magnificently for a brief time but now is nearly extinguished.
I love your optomism but I fear our technology and civilization have reached their apogee and will soon begin a swift descent. We are lucky to have seen it. It will be hard to watch the last death-throes of a golden age.
Best regards~Svin
AIG insures the govt.
I think you get this (you’re smart, of course), but you’re not applying what you know in one arena to this one.
Say, for example, that you become the CEO of Boeing Aircraft (hey, it could happen). You know a LOT about airplanes, but you don’t know everything, about every part, assembly line, or know the names of every worker. There are (probably) 12 levels of hierarchy between you and the average guy on the assembly line.
The further you get from your core competencies, say to the division that handles the loan and credit arrangements customers contact to finance their purchases, the further away you are from validating that what they’re doing is 1) Correct, 2) Above board.
You have to rely on people to tell you the truth. You have to rely on other people to tell you when those people might not be telling you the truth, as well as constantly improving your own knowledge to prevent from being bamboozled by fast talkers and scam artists… but there’s only so much you can really do, if there are folks out to scam you and anyone else.
If that division is profitable, if it is way profitable, pulling in revenue that is beyond their projections, and that revenue is allowing you to fund other development efforts and keeping the shareholders happy, you’re going to have a hard time justifying scrutiny of the people who are doing all that good stuff.
If their success is based on cheap money you’re not going to really understand that (unless you had also had a co-major in Business and Finance that I don’t know about). You can understand it intellectually, of course. We all can. But when it comes to the nuts and bolts of mark-to-market or any other accounting and finance jargon, understanding it conceptually and doing it practically are totally different arenas.
If you ask the normal questions, such as “Are other folks doing this?” and “Is this all on the up and up?” You’re going to get two answers (both the same): Yes.
So the division collapses because other factors in the economy tanked the loan rates and accounting changes altered the way that public companies are valued. Those exterior causes impacted your bottom line and the way that the division functioned. Now you’re blamed.
Technically, you and the Board are responsible. But because we’re not morons and really do understand how people can THINK they’re asking all the right questions, and performing all the due diligence they should, shit can happen, regardless.
No one, not one person, predicted that the great Tulip investment by Holland would collapse their economy, and create a wave of failures that achieved the first global meltdown of the global economy. We learned from that–not to over-invest in any one sector, not to hedge without sufficient guarantees, but that is easier to understand when we know what tulips are, and we can see them growing in the field.
Betting on failure, without sufficient hedge, is not as easy to understand as tulips. The market for tulips might expand or collapse… with forces outside your control to determine which it will be, but that assumes you know you’re growing tulips. On this, few really understood the risk (or why their profits were so great, but they knew they and everyone else liked the profits), and the scam artists didn’t ever think the market for tulips would collapse.
A great convergence of events had to occur to make this happen. And it did.
As the subway races towards them, Agent Smith utters to Neo, “That is the sound of inevitability.” We still have a tremendous number of successful people out there that live a moral upright life and would do nothing to risk their reputations. Unfortunately, we have a growing group of people that will sell their souls for a bag of silver or gold. In most cases it is inevitable that someone that will do anything to get ahead will go further than someone that has limitations on their behavior.
So now we have Presidents that will say one thing and do another. They get caught with their hand in the cookie jar and there are no repercussions because a majority of those that are supposed to be policing them are doing the exact same thing.
Most people these days don’t want to be dictated to as to what moral behavior is because it infringes upon their “freedom.” And they are too blind to notice that they have become slaves to their behavior. I think we could call it human nature. For many that are left to their own imaginations and devices, it is inevitable that they will gravitate to this end. And to some measure, we are all responsible for this failure.
My father has worked in the financial industry for the last 30+ years, and he told me some interesting things. It seems that many of his colleagues knew that the sub-prime housing market was a bubble, and wouldn’t sustain indefinitely; they just thought it would take longer to pop than it did.
When the management, shareholders, etc. constantly pushed towards improving the value of the company’s stocks and lost focus on making actual physical profit, it encouraged the kind of behavior that lead to the bubble. People stopped worrying if you were really doing well and simply worried if it -looked- like you’re doing well. A lot of people knew it wasn’t sustainable, but they wanted to keep the stocks high… so they tried to ride the wave forever and ended up crashing and burning.
This relates to your intuition on personal morality in a very specific way… There were people aware of the problem who were more interested in maximizing their shares and getting out before the bubble popped, rather than working towards the long term success of the company. Now, how many people was this, and can we place a large portion of the blame on them? I don’t know. I’m sure many other employees simply were working hard to meet the demands of management, who were working to meet the demands of shareholders, who were demanding that the shares go up, up, and up. Does that excuse them? Does it matter?
In the end, many other problems (including potential ‘solutions’ to the problems) lead to the current situation, but a lot of it started with the housing bubble… and I’m not sure how to avoid repeating it. How do you prevent a situation fueled by shareholder ignorance, well meaning management, and value based on perception? It’s a tough question, and an important one when we can’t necessarily rely on the fundamental morality of all the parties involved to work towards real, sustainable growth rather than temporary maximization of their shares.
(And I’ll go ahead and say that it’s confusing enough that I don’t even know how to clean up this post, so forgive me for being messy
Nothing like a good scapegoat, huh?)
Mrs. duToit,
“If that division is profitable, if it is way profitable, pulling in revenue that is beyond their projections, and that revenue is allowing you to fund other development efforts and keeping the shareholders happy, you’re going to have a hard time justifying scrutiny of the people who are doing all that good stuff.”
Coming from the viewpoint of someone who is in a financial Compliance/Regulatory role these days, I can pretty confidently say that your scenario is exactly the sort of thing that is supposed to trigger extra scrutiny.
Those aforementioned ‘projections’ may seem to be pulled out-of-the-air (and if it were left to Marketing & Sales, they surely would be), but there’s an awful lot of ‘risk-assessment’ and ‘impact-study’ related research that goes into those projections.
“Meeting” those projections is certainly good and “Exceeding” them definitely a cause for celebration – but “outstripping-them-beyond-the-dreams-of-Avarice” means that a LOT of talented people who spent a LOT of time on a LOT of pre-work were just wrong…and that’s not supposed to happen.
It would have triggered an internal audit – and it would take someone(s) with a LOT of ‘whack’ to either stop that or ignore the findings after-the-fact – and, since post-finding processes roll on in a fairly machine-like manner, THAT would have to be a conscious and deliberate decision on someone’s part.
…which brings us back around to the “fundamental morality” point.
– MuscleDaddy
Bill, So when did this transition from integrity and self regulation morph us into every man for himself? The Model is the New Deal. Sliced and diced by Wall Street and the Federal Reserve, FDR offered an “exit” that became the model for Government “Bailout”. When players know there is no “failure”, the rules get loose.
“Success breeds Competition”.”Great success breeds ruinous competition”. To avoid the “Ruinous” part, the “Pre-Mega” progenitors of financial oligopoly ensnare the Pol in inescapable protectionism and outright hostility to those who remain honest and competitive. Hence “Too Big to Fail”. It is a construct, meant to trap the thick in a spiral of “Bailout” frenzy. It is ludicrous to say the Market fails if Lehman fails; Think of this, the largest of corporations lose what makes for success in a capital economy, AGILITY. It is the Behemoth that requires support (Subsidy) to allow it to survive.
In the face of this pathetic failure, people are being told that to avoid further failure, those who failed the model need to be Resuscitated ??
AF
Muscle,
Having spent a lot of time sitting next to internal auditors, I know of what you speak.
But that’s not the playing field we’re in anymore, which gets back to Bill’s points.
I’ve also been on the receiving end of valuations of companies I launched that were valued way above any profit we could reasonably make… “once they went public.”
We walked on them because there was no way that I was going to sign on to a company with those projections and that valuation. “But you could make $250K a year until it went bust” was the advice from the money people. “I can choose to sleep at night” was my response.
The best advice/meme I ever heard on this was from my brother-in-law: “The idea people always get fucked by the money people.”
The new-business market is no longer about making long term profits, ie, making profitable businesses. It is all about creating a business that will make a killing when it goes public and benefit shareholders, regardless of how sound/practical is the business model.
It’s fiction on fiction. If you express concepts like “profitable company” or “sound business model” they’ll look at you as if you’re trying to manufacture buggy whips. “No one says those things anymore.”
People are interested in short term profits, not investing in great ideas that will pan out in the long term. They want their profit NOW. It is not surprising that CEOs are in the business of making their shareholders money from leveraging their financial status, rather than making a profit doing whatever is described on their business card. Companies are no longer run by idea people. They’re managed by accountants and finance people with MBA degrees.
Anecdotally, we had a business model that was $8 million for the first 3 years, with a 3:1 return after year 3. We were told to change the plan, ballooning our costs to $20 million doing 5 year instead of 3, putting us on the radar of competitors, and to collapse the profit into year 3, with a 2:1 return. So even though the return was lower (by percentage), “no investor will want to invest that small an amount” was what the money people told us. Crazy!
It’s been crazy out there for a long time!
The reason I’m not rich is not because I couldn’t be. It is because you have to choose between committing fraud or being middle-class. I’ll choose the latter, thank you.
Bill,
The United States has degenerated to a point where the words “capitalism” and “republic” have become largely meaningless. Corporate executives now find it more lucrative to lobby government than produce genuine profits. We call this condition crony-capitalism. You ask who sits on these corporate boards? Too frequently people who can’t even read a balance sheet. Like the wives or kids of a politicians for example.
The United States is now run by an oligarchy. Who are they? Our entrenched political class and anyone who can purchase access to them. As Ayn Rand predicted, we are now ruled by a class of professional looters. They produce naught, but they are highly skilled at collecting their filthy lucre through legislation.
When I graduated from college some thirty years ago, I got my first job with the IRS. At the time the tax code looked like a stack of phone books bound in volumes. You need to understand that every statute in the code was placed there by someone for someone else. Indeed, the standard practice is for the lobbyist to write the law; it’s merely the job of a congressman to insert the provision into some sort of omnibus legislation so that it becomes the law.
Our window of opportunity to restore the republic is closing fast. The citizenry must jerk away from the oligarchs the means by which wealth is redistributed before the condition becomes permanent. Sacking the tax code, curtailing regulation, abandoning the minimum wage, and placing effective constitutional limits on government would do that. Such a program would restore economic liberty to its maximum potential. L’aissez-faire? You betcha!
Bill, you’re right. It is a fundamentally moral question. I think I can help triangulate it a little, I hope.
I see two things going on, maybe three.
First.
We have lost the distinction between wealth creation, and wealth management. Wealth creation is what Boeing and Microsoft do, or a truly talented artist. They assemble the bits and create something with a higher valuation than those bits. Wealth created.
Any changes in the market value after that creative act are merely wealth management. I’ve met many people who have degrees in “content management”, but don’t seem aware that without content they have nothing. The money people may screw the idea people every time, but without the idea people, the money people starve.
Business culture has cone to believe that a derivatives trader is morally and economically equal to an airframe designer. Failing to realize that without the airframe designer, the trader doesn’t have any wealth to manipulate. And so we get a carrion crow like Soros. As opposed to someone like Buffett.
Second.
Scope and timeframe. Business culture seems locked into a four-year business cycle. Too many decisions are made that are sensible in short term, and lunacy in the longer term. It’s a failure of vision and scope. The sort of organizational incest that you’re describing is perfectly sensible from the perpective of an individual exec, responsible to a single generation of a BOD. Shareholders and directors want short-term profitability, so managers make short-term decisions. Buying regulators is a perfectly good short-term strategy, since by the time it boomerangs, you’ll be gone. There are very few organizations that either can or will plan for the longer term. Buffett is an exception.
Second-and-a-half.
The American educational system has spent two generations denying that there is any relation between rights, liberties, duties, and responsibilities. Pure, unenlightened self-interest, without a societal context to moderate it. I got mine, screw you.
Combined with a decreasing respect for written law, the consequences are as we see. No jail time, no foul. Jake DeSantis is an honorable man, and I would like to shake his hand.
“Reputation is what other people know about you. Honor is what you know about yourself.”
Lois McMaster Bujold.
Bill, you hit the nail on the head, as usual, and MuscleDaddy elaborated on the concept very well. This melt-down has everything do do with fundamental morality, as does every other facet of life. Somehow, our nation has gotten out of the notion that “a man’s word is his bond” and has progressed (if that’s the word) to “if it feels good, do it.” Trust is no longer a public virtue–heck there aren’t any virtues any more.
Contracts aren’t worth anything–they’re too easy to weasel out of these days. Marriage having problems? Get a divorce. Pregnant and inconvenienced? Planned Parenthood can help you out there, regardless of your age. Mayhem in our schools; radicals teaching our university students; pay-for-play scandals a dime a dozen; some of the most popular music our kids hear promotes the most vile and disgusting acts; the way I see it, it wasn’t an “if there IS a melt-down” it was only a matter of “when.”
I long to see more men like my father, grandfather, brother and husband: men of their word, honest, trustworthy, men who, when they said they’d do something, they’d DO it, regardless of cost to self. And I long to meet more women like my mother, grandmother, and sister; intelligent, achievers, passionate, and nurturing.
We’ve lost the prototype of American Manhood, American Womanhood, and most particularly, American Morality. We’ll know we’re on the right track when they start to re-appear in society.
I have always been proud of the quality of the comments at E3, but never more so than in this case.
I will tell you what it has done for me. Just what I have seen so far is enough validation to move forward with a very risky idea I have been working on: and I say “risky” because I have some ideas about business and free enterprise, but I know essentially nothing about the details.
I dropped the “fundamental morality” line as a quite conscious piece of bait, to see if I was perhaps on to something or way, WAY off the mark. The fact is, I now deeply regret singling out AIG in the original TONE DEAF, and I did not want to make a similar mistake again, because economics is just not my bag, man.
But what IS my bag, man, is the big picture, and I have been watching this and thinking very deeply about things like Bailey vs. Potter and even things like Grace vs. Law. And I am going to write this thing I’ve been thinking about, and I’m going to call it what I always wanted to: THE WAY HOME.
And I have you to thank for it. For God’s sake keep the analysis coming. There is more common sense explanations of buisness rights and wrongs in these score of comments than I have read or heard anywhere since this mess came to my attention.
I’m in awe of you guys.
BW
Be aware of the CEO who’s more comfortable schmoozing with politicians than being on the manufacturing floor. For the morality of rational self interest vs. collective egalitarianism, I’d suggest reading (or re-reading)Atlas Shrugged. Never has the book been so germane as it is today.
Shoot! I meant to write “American Virtue”, not “American Morality” in my last paragraph.
Please forgive.
Milton Friedman said that the greatest enemies of capitalism were the businessmen. The problem is that once one business takes one step toward this crony-capitalism, the fate is sealed. Why? Because the only way then for legitimate businesses to compete is to cheat equally.
Case in point: I watched the auto-bailout hearings and was stunned when something was revealed. See, when you got a loan from GMAC Finance, or Ford Credit, or Chrysler Financial, that company didn’t hold your loan, they turned around and sold it to a real bank. So instead of cutting out a middleman and creating a new profit center for themselves–doubling down on each car sale–they added a middleman and used that status to ruin banks through complex fraud.
Now, this I hear all too often: “I have NO PROBLEM WHATSOVER with a successful CEO taking tens of millions of dollars in compensation… as long as that compensation is based on success.” But this is a scale thing. If I can get $20 million guaranteed, payable whether the company succeeds or fails, then I should be able to get maybe $200 million based on merit, since I’m now assuming a risk.
There is, of course, a way to ensure that pay is merit-based: have the owners run the company. Have more tycoons who spend their time running the businesses to make money. One problem today is that the owners of one company are the officers of another company, the owners of which are the officers of the first. Hand-in-glove.
But, none of it is possible without the government as the hired goon. When a company hires a CEO for guaranteed money, the stock ought to drop like a stone, because this company is not confident of success, and because its captain now has no motivation to keep the ship afloat. But you have your SEC interfering.
So what’s the solution? Well, I liken a country and an economy to my Windows install. Sometimes you have to uninstall kludgy programs. Sometimes you have to run virus scan. Sometimes you need to clean the registry. But when there are fundamental problems with even booting up in the morning, it’s time to bite the bullet and reinstall, even though that means you’re going to lose a lot of programs and stuff.
We could do far worse in this country than starting from scratch with the Constitution. Close every government agency except for Congress, the White House, and the Supreme Court, and kick out everyone in those. We need some sort of revolution. The beauty of our country is that our revolutions have usually been bloodless (Jefferson, Jackson, both Roosevelts, Reagan). If we can pull it off again, more power to us. Otherwise we will need to tear it down and re-convene in Philadelphia.
Mrs du T:
People are interested in short term profits, not investing in great ideas that will pan out in the long term. They want their profit NOW.
Yes, you’re right. I think there’s a reason for the increase in short-term thinking. Sad as it is, short-term thinking is a rational response to unpredictable regulation and taxation. A huge problem for business in this country is the unpredictability of regulatory boards and “public interest” lawsuits. For example, when the EPA rules some common industrial substance a hazardous chemical, companies that actually make stuff suddenly have huge liabilities. Their costs for waste management skyrocket (assuming the regulators even leave them legal options for disposal), their insurance company raises their rates 10-fold because of the added exposure, and various enviro-front groups start lining up to sue. Overnight, a profitable business model is ruined.
The increase in ad hoc, unaccountable regulation has created a business climate where long term planning is discouraged. So many previously commonplace, unremarkable things have been made illegal, how can you even assume it’ll be legal to continue your business five years from now? For example, the Washington State legislature, amid a massive state budget crisis, is considering a bill to require interior decorators to have a license.
Heaven forbid an unqualified person advise me on what color to paint my living room. The drapes might clash with the couch.
Busybody legislatures, a proliferation of unsupervised regulatory boards, and courts that make themselves available to every axegrinder and pot-banger are due a large share of the blame for our current moral business climate.
Bill,
For me the answer is simple, perhaps simplistically overwrought but salient none the less.
A righteous people will have a righteous government/(business) and an unrighteous people will have an unrighteous government/(business).
Any “singling” out is not productive becuase the problem is systemic, at least 50% of the people in this country would screw over a stranger for $1000 dollars if they thought they could get away with it. After all we willingly elected close to 500 people every 2 years who do just that.
It is absolutely a question of fundamental morality, and generally people who want power get it becuase they will do what ever it takes to get it.
our country is a very sick patient.
Bill W,
Here is what I think, insurance is (generally) a bad bet for the insured. The insured (generally) pay more in premiums (collectively) than they ever get back in claims. That is why insurance is (generally) a profitable business model. The problem with AIG “insuring” (well, can’t say insuring because what they were doing wasn’t regulated) these “mortgage products” these “credit swaps”, was that there was NOTHING to prevent those who wanted to walk away from their now upside-down houses, from doing so.
People in our country were under some false belief that they were “entitled” to home equity. You NEVER look at a car that way. Everyone knows that the moment you drive a new car off the lot, you just lost about $3000 (at the bare minimum) and you are happy to pay it. But your HOUSE????? No, you don’t want to even imagine losing money on that.
So we had millions, millions of people who were suddenly upside-down on their homes. Well, that just will not do. Better to “mail the keys” back to the lender and start fresh (after 7 years of trashed credit) than to continue to pay a massive mortgage on a house worth far less than you paid for it. Now it is the bank’s responsibility. So who does the bank turn to, to recoup some of their losses? They turn to their “insurance company” (AIG) to cut them a check.
With a 1% home default rate, AIG’s business model succeeds. They collect “insurance premiums” from the lenders on the 99% of homes that do NOT default (or slip into foreclosure) and pay claims on that 1% that do. But with an 8% default rate (or now, 12%) you are bankrupt.
Basically, there wasn’t enough chairs left in the circle when the music stopped. That is why the government had to subsidize them with taxpayer money. This wasn’t a thing that the board of directors could control so much as we’ve never had a period in our short 240+ year history where people lost so much equity in their homes in such a short period of time. We never had any data, any evidence, any history on what to do about this. And if lenders aren’t FORCING people to put 20% down on ALL their future mortgages, we might be back right where we are now in the not too distant future.
That is what I think. AIG messed up because the business plan fails in the unique circumstance where you have such greedy people who would rather walk away from their responsibilities than ante up….
I agree, except for one caveat, Paul. Home equity is a modern invention/phenomenon. Land appreciates over time, but a house increasing in value is a new thing (last 50-75 years or so). Houses themselves used to depreciate in value. They were more in keeping with the way we think of automobiles today. A “used” house was not as valuable as a new one. Labor and materials costs didn’t increase the way they have in the last 50 years.
Even so, “equity” is a strange concoction of concepts when it applies to houses. Equity, outside of paying down the mortgage, occurs in folk’s minds when their house increases in value. It is a false increase, however, because every other house went up, too (yours and your neighbors). People have liquidated that asset and bought in cheaper areas, but you have to leave a high priced area for a cheaper one to realize that equity. With interest payments, PMI, real estate commissions and maintenance expenses, they are actually a net loss. The only “value” (different from any other investment) is that you get to live in them.
Foreclosure rates and value losses have occurred like this before, but they were limited to regions. In reality, that same thing is happening today, except it is happening in more than one region (in about 20 housing markets) and that is causing the foreclosure rate in the nation to be at the figures you quoted (California, New York, and Florida are pulling down the national average… where creative mortgages and “interest only” loans were king). They make up the bulk of the losses. In most areas in the country, real estate prices are either flat or modestly increasing (the way they do in those areas historically). When people are speculating in real estate, a bust is a given.
Having lived through two housing busts in California, one that created a 25% foreclosure rate in Los Angeles, I can personally attest to the chaos it creates. It’s all fine and dandy to suggest that people shouldn’t “walk” from their houses, but when your mortgage is a 1/4 million on a house now appraised at @$100K, and you have damage you need to repair (caused by flooding or other problem that isn’t covered by insurance) or a job loss because of a regionally tanking economy, there is nothing else you can do.
Where we live now (DFW area) the houses never appreciate like they do in other markets (about 3% a year, keeping up with inflation only), but you never lose your shirt in these markets either.
No boom, no bust.
Mrs. du Toit,
While I agree with your analysis, I have one nit to pick. There was a time into the early 1980′s when credit card interest was deductible for people who itemized on the 1040 (Sch. A). In other words the government encouraged consumer debt through the tax code.
When the provision was rescinded by congress, the banks began to offer second mortgages that would pay off credit card debt and restore to consumers the deductibility of debt interest. The government moved to curtail debt, but the market responded in the name of profits to circumvent government intentions.
We might well ask why government would encourage home ownership through the tax code to begin with. My understanding from my days at IRS is that home ownership builds stronger neighborhoods. Fair enough, but at what point does government policy cause market distortions that undo the intended benefits? Well, we’re seeing that now.
The nit I am picking goes back to Bill’s question of moral failure. A wise man knows that consumer credit is a convenience, not a lifestyle. The fool leaps for a chance to acquire unearned goods he cannot otherwise afford. Therein lies the moral failure, compounded by government policy that distorts the markets, magnified by the law of unintended consequences. And now we are stuck.
So, what is a house worth? Here’s my novel answer: unparalleled freedom for the owner once his abode is paid for. How is it that so few think this way? Perhaps because someone with an active life of the mind views his time to read, think and write as far more important than his level of consumption. That, I guess, is rather the exception. But I bet more of Bill’s readers can relate to this idea than do not.
In the seventies and eighties, credit silly people would be encouraged to “refinance”, pay off their “signature debt” with a cash suck from their “homes”. The lending institutions then reissued plastic to these same unfortunates, and the loop was ON. Greed, on the one hand, Stupidity on the other. It is ever so. I blame the schools. I am NOT kidding. Does anyone make the connection to the current Industrial Grade Cycle of selling AIR? No consequences, no change, and the wrong people pay. Ah my Sweet America.
AF
Sorry Mrs. du Toit, I’ve just read your contention that Equity is in the homeowners’ minds. Obviously, if folks can leverage their secured interest, that statement is wrong more often than it is correct.
People are interested in short term profits, not investing in great ideas that will pan out in the long term. They want their profit NOW.
Back in the 1980s, Tom (?) Peters (the “In Search of Excellence” author) had a column that appeared weekly in my local paper. I remember one of his columns about short term verses long term thinking. It was his contention that the decline of American industry tracked very closely with the rapid growth in the number of MBA graduates in the country. He stated that MBAs were trained to look far more closely at the next quarter’s profits instead of what was good for the company’s longer term success. IIRC, he went so far as to claim that companies that took the longer view were often creamed in the stock market because they were investing money that could’ve been marked as profit instead.
I don’t have the background to know if Peters was right but that column stuck with me for all of these years. It sure sounded correct.
Mrs du Toit,
>>>>It’s all fine and dandy to suggest that people shouldn’t “walk” from their houses, but when your mortgage is a 1/4 million on a house now appraised at @$100K, and you have damage you need to repair (caused by flooding or other problem that isn’t covered by insurance) or a job loss because of a regionally tanking economy, there is nothing else you can do.<<<
Well then, this nightmare will repeat itself. If there is nothing else you can do, then someone else is ALWAYS going to pay for your misfortune (or greed.) In this present case, AIG is the one who is paying.
AIG’s “sin” in this is assuming that the market would always go up. Their entire business plan (“credit default swaps on mortgage products”) works 100% of the time when those whom you MUST foreclose on, have a house worth more than the loan amount. This failed. So did AIG.
So the next time people “walk away” (as you claim there is nothing else they can do) and another insurance company must be bailed out by taxpayers dollars, that will be OUR FAULT because we didn’t correct the problem (ie: make the mortgage defaulters accountable.)
Bill Whittle wrote: “… that they [certain large companies] have been able to achieve a symbiosis with what should be their natural enemies…”
No. Large companies are natural allies with big government for all of the reasons you’ve named. It’s always been that way. “Trustbusting” has more often been a way to shake down a large company rather than actually dismantle it.
Bret, I couldn’t agree more. The enemy of SMALL businesses is the Government. Likewise the small guy eats market share, doesn’t have a lobbyist on the Hill or Jefferson or Frank’s number on speed dial. The two least efficient at what they’re intended to do, DC and mega Corp, are blood buds. Retiring Pol? There’s a place on the Board, or overseas; Wanta git into the Game? here’s enough dough to get elected. Incestual dinosaurs, well past their prime, all of em.
Excellent point, Brett — I fully concur.
Which leads to an interesting question: when a company sits on that transition point where the scales begin to tip… what does that look and feel like?
Second question: Would it be morally justifiable — if such a metric could be devised — to legally limit the size of a company before it crossed that line, as a form of pre-emptive trust-busting?
My natural inclination is toward freedom: just leave things alone. Moral people do not need laws since they are constrained by their internal character. But laws nevertheless ARE needed to protect the honest from the dishonest. This is clear among individuals. Should not the same apply to companies? Is it ‘anti-business’ to call for moral and reasonable regulation? And how do you decide what regulatory limits are enplaced out of a love of commerce, versus those that are emplaced out of hatred or mistrust of it?
Meta-question: how do we create a system that is like a BiPAP breathing machine: low pressure (of regulation) when things are going swimmmingly, and an automatic increase in regulatory pressure when a sensor determines that more pressure is neaded… That keeps the regulatory pressure always at optimal — that is, MINIMAL -levels.
That’s a neat idea.
BW
I’ve been thinking a lot these days about a famous quote, “Why Democracies Fail,” attributed most commonly to a Scottish historian called Alexander Tytler (but quite possibly written by de Tocqueville):
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.”
It’s a bit unfair to hold impermanence against democracy — I know of no human institution capable of lasting forever, with the exception of Holy Mother Church (who has help). But much of what I see today makes me think of this quote.
If Fannie Mae and Freddie Mac are not ultimately about the public voting themselves largesse, in the form of illusorily affordable mortgages, at the expense of the rest of the system, what are they about?
Which leads to an interesting question: when a company sits on that transition point where the scales begin to tip… what does that look and feel like?
I think I know, at least from one angle. I think I rode through that transistion with a previous employer. When I joined, the founder was still CEO and still active in day-to-day affairs. The company had grown geometrically and money was pouring in. We were the biggest company in our industry, had gobs of cash in the bank, and everyone still went about their jobs with the idea of making a better product and pleasing the customer (not everyone always had the right ideas for that, but it was usually the goal).
But Wall Street demanded growth, and it gets harder and harder to maintain 20% revenue growth when you are already huge. Many of the mid-level managers had unvested stock options that would only be worth money if the company kept meeting Wall Street expectations, so they put their time and considerable energy and IQ into finding ways to generate that growth.
Of course that meant risk.
The junior execs began pushing for riskier and riskier endeavors, since that was the only way they’d ever get really rich off their stock options. The senior execs, already wealthy beyond their wildest dreams, got a little drunk with success and thought we couldn’t fail, no matter how nutty the idea. The CEO was in charge though and still kept some rationality in play. But as the company got bigger, third parties (the government, consumer groups, random pot-bangers) got more and more invovled. We became a target for shakedown artists looking for a buck, and ambitious politicians looking for a fat cat to rail against. The CEO got worn down – he found himself the target of character assasinations. He had been hailed as a hero, building a widely admired company and bringing better products at lower prices to millions of customers. Now he was called a villian, a robber baron. He retired and all hell broke lose.
Business managers began looking for ways to raise prices instead of ways to please customers. Those junior execs ran wild with their insane schemes – none of which panned out. Quality fell. Prices rose. We opened a lobbying office on K-street in DC. I can’t stress enough the difference when the founder was no longer in day-to-day control.
Maybe that’s the signal – when control gets handed over from the first group who made a fortune with the company to the next group who also desire to make their own fortunes. I think it’s rare for a single company to provide legitimate fortunes to multiple generations of leadership. The ones who come after are led into mischief by their desire to have what they saw their former bosses have.
Your comment regarding the involvement of corporations and donations is something we have eliminated here in Canada.
The law here is a maximum of $1100 per individual-per year-no union, corporate or other businesses may contribute large or any funds to their party of preference.
Perhaps my friends in the USA could look at this model as a way of getting out of the business influencing procedure and just get an even playing ground for all parties.
Nature sets limits on size. Apparently, the Brontosaurus is about as big as a reptile can grow. Mammal? Blue whale. Cells don’t grow too large before DIVIDING. The secret to any venture is an ability to move, eat and reproduce; more than that, consider diversifying. There is then an upper limit to size, that being the loss of AGILITY.
Why should a small company outperform a larger one? Fewer troops to feed, supply, and care for. Why the success of small insurgencies versus huge armies?
So, to government. Why am I enamored of local jurisdiction and governance? If not obvious, look at DC. When a CONSTRUCT takes on a personality, sell it to Disney, don’t rely on it to provide your reason for living.
Every Political entity that comes to mind failed due to bloating, lethargy, and loss of Will. Will? Without it, nothing lives. The DC experiment (It IS one), seems to be there. The Will in Washington, and most large Boardrooms, is no longer about what is best about us, but what is worst. This speaks of a multitude of failures; unwind the bureaucracy and what does one find? Desperation. The last throes of a dying organism are spent in seizures of fear, denial, and make-believe.
Rahm Emmanuel is a spooky wonk. He is, however, not wrong. The Chinese have an alternate definition for crisis.
Opportunity.
AF
I think both JMH and Airfoil are onto something. The first generation of a company strives to make its fortune by building the proverbial better mousetrap and meeting customer requirements through top-notch service. After time, this often gets harder and harder to do. Technology changes, customers’ needs change, and only the most agile, tech-savvy (depending on the industry) and customer-focused companies can keep up (there’s that OODA loop thing again, Bill). So once the company has grown to a certain size, the founders have moved on to greener pastures, and a new generation of executives is charge, what happens? Maybe the new management team diddles with the pricing structure, trying to wring more dollars out of its existing product line. Or they try some sort of “creative financing” scheme to try to get higher returns on idle cash or assets. Or they try to cut costs. But the problem is that these are not product- or customer-focused changes; they’re finance-focused changes that do nothing to improve product or service. When a company hits this point, it’s on the decline. It can recover, many companies have, but a lot don’t.
I should add that none of those indicators of decline that I mentioned is necessarily a bad thing by itself. But when the focus of a company becomes its finances rather than its product or service, then it’s putting the cart before the horse, and it’s only a matter of time before a competitor comes along with a better product or better customer service, and starts eating the established company’s lunch.
An unfortunate parallel may be simplistic, but worth considering.
Following the “Greatest” generation, which was tested by severe Economic, Political, and other upheavals, (WWII)?, was the Boomers. For whatever reasons, (another story), the Booms sought the path of least resistance. Following the magnificent Primacy of the US’ manufacturing economy was the impetus for “financial” services, sales, and Politics. Whatever the coalescence, there has been a steady Drift since the fifties toward a system that is reward driven, rather than process driven. We see the “rewards” all around us, consumerism instead of thrift, recreation rather than work, and “live now” rather than look to the future.
I Blame Benjamin Spock…. and the French.
AF
By the weekend? Which weekend? Isn’t it already the weekend? Or did you mean end of the week, as in Saturday at midnight? Okay … I’m snarky because I want to read it! Holding it? C’mon, man! Give it up! Are you getting THAT commercialized (not that I blame you)??? Give it up, man!
Oh … have a nice day.
The first generation of a company strives to make its fortune by building the proverbial better mousetrap and meeting customer requirements through top-notch service. After time, this often gets harder and harder to do.
A small or medium sized company can grow profits by growing it’s market share. The best way to grow market share is by offering a better product or a better price (or maybe both). Better value to the customers.
A large company can’t grow market share very easily. Going from 5% to 20% is a lot more doable than going form 20% to 80%. So large companies – even if they got large by offering great value – have to start growing profit margins. That means charging more or cutting costs, and the easiest way to cut costs is to cut quality. So they start charging more for less.
It’s driven by an equity focus. Drive equity up, forget about revenue streams, that’s just an input into the PE multiple (that’s the Profit- to-Earmarks ratio, if anyone from President Obama’s staff is reading). Sad, because a large company with a steady dividend could be very attractive to many investors, but it doesn’t make the money people much money, and it doesn’t make the up-and-coming Jr Execs rich.
Corvette or Peterbilt? Here I disagree, jmh. At either end of the Corporate profile or mission is the Turn and Burners (Corvettes) or the Longhaulers (Peterbilts). Once the business can grow past its Brand, and establish a diversification into Growth other than product, substantial change is required. Adding divisions or subsidiaries is expensive, and pressurizes the single purpose types left over from the wire on plank mousetrap guys. GMAC was born well ahead of the exodus of Glass/Steagall, and capitalized (sic) on the BRAND to venture into Capital management and products. Should GM have added parts suppliers instead to its Corporate umbrella?
United Airlines in the 80′s purchased Hertz and Hotels up the jacksie, how did that work out? The safety of sheer size ceases to be a plus when the mission is piggybacked and drains resources from the First Born. Growth is simply a facet of FLOAT, there is a reckoning at same point in the future. We’re there. Do what you know, always. Everyone.
Wait. If a company does what it knows and grows too big, the Fed chops it up into smaller bits. Unless it grows too big and becomes “Too big to fail”, then the government gives it gobs of money? What’s a Mother to do? The Government is this thing and it may not be in the Dictionary:
SCHIZOPHRENOGENIC. No Rules for some, Too many for others, it’s why I sold my small business, play Golf and don’t look back.
Adding divisions or subsidiaries is expensive, and pressurizes the single purpose types left over from the wire on plank mousetrap guys. GMAC was born well ahead of the exodus of Glass/Steagall, and capitalized (sic) on the BRAND to venture into Capital management and products. Should GM have added parts suppliers instead to its Corporate umbrella?
Or maybe just built cars and not worried about continued revenue growth? I know Wall Street would have crucified them, but that’s part of the problem.
I think government is the Arsonist/FireFighter. Whether it’s the Diet, Parliament, or Congress, much mischief lies in potentiating commerce, then destroying it. The “Overseers” are more like the Carrion. Regulation, instead of a Tool (“Regulate Commerce…”) becomes a weapon, its use sold to the highest bidder, regardless of risk. As Unions grew, they gained power (wealth) and were able to amass contracts that stood up to “scrutiny”, but had a hand in killing the Goose, eggs and all. Case in Point: A lifelong Chevy driver, from Corvette to Silverado, I will no longer purchase GM. Run by a popularity contest winner, and backed up by the Government, it is doomed. Ford, unsullied by Government “investment” or intrusion, has a better product now, by definition. People who have never owned or operated a business are now in direct charge of the economic engine of our Country?
Does anyone have a big picture? Maths majors ran swell looking programs that dazzled Wall Street, idiots who borrowed and stole money to “buy” these products lost it all, and in one weekend, Congress writes a Trillion Dollar check to cover their losses? Working people by the millions have their children’s future’s stolen by a Congress who doesn’t READ the huge spending bill they Pass? Wait, AIG is manhandling what amounts to a shiny penny called Bonuses, and the masses shriek? Where is the Outrage? Where is the Press? Wher is the peoples’ MIND? We need a reversal of course, a prejudicial vacating of the pretenders in DC, replaced by those of us who remember the Constitution, not Barney Frank’s Phone number. Or Joe Biden’s or Al Gore’s, Single Bullet Specter, etc etc.
AF
Bill, what would have happened if AIG had not insured the lousy mortgages that the GSEs essentially created? The economy would be just as bad. The wealth had already been destroyed by government when the initial mortgages were written. AIG’s mistake was assuming that the government would always stand behind the GSE’s securities. That assumption even appears in basic finance textbooks.
See my article:
AIG is Left Holding the Government’s Bag
http://www.capmag.com/article.asp?ID=5470
So the next time people “walk away” (as you claim there is nothing else they can do) and another insurance company must be bailed out by taxpayers dollars, that will be OUR FAULT because we didn’t correct the problem (ie: make the mortgage defaulters accountable.)
That makes it sound like I’m advocating the outcome. If you lose your job, cannot live in a home because it is damaged (requiring that you pay for a second abode), and cannot pay your bills, the outcome will be bankruptcy. Foreclosures often require bankruptcy (not always, but often). (Keep in mind that the vast majority of Americans are 90 days away from homelessness. That’s not new. That’s been the case since mortgages became morally acceptable… and they were once a sign that you were already in the poor house.)
Bankruptcy laws were also tightened about 5 years ago (at the behest of the banks and credit card companies), which was a contributor to the problems we’re seeing now.
Rather than a steady stream of do-overs akin to shedding skin, people have been forced into payback (over 2 to 5 years) to try to payback their debts…keeping them in a debt death-spin for a long time. Well, that only works for a while. That payback bubble burst… Those paybacks work as long as nothing changes during the payback period… but change IS a constant, and eventually a small change will magnify.
Rather than having these bankruptcies occur in the year the folks realized they were in trouble, they’ve been saved up, and are bursting now, all at once, and that all-at-once hits the insurance companies all-at-once, too.
Think of all the small fissures that occurred in the last few years: gas and heating prices rose, a slight increase in unemployment, slight downturns in housing prices, etc. If you’re on a payback plan, you’re now going to default… not because you don’t want to pay, but because you no longer have the ability to buy the tank of gas you need to get to work, or can’t buy groceries to feed your family, or the renter in your second property lost his job.
The economy can handle the small percentage of people in financial distress, but if you change something (as with changing the bankruptcy laws), you’ll see a slight decline in bankruptcy during the early periods after the laws are changed… but it just delays the inevitable and saves it up for another day… which we’re now living through… with a huge dam burst, all at once.
If those defaults had been allowed to occur 5 years ago (and each year during the last 5), AIG and others wouldn’t have had profit-only on selling that insurance. They’d have had slow and steady payouts, and had the diversity in the size and scope to handle it… and American taxpayers wouldn’t be paying for it now when it hit the banks and insurance companies like a tidal wave.
The changes to bankruptcy laws kept people from declaring their insolvency (and getting on and over it). They were insolvent, but unable to make it official. That is where much of the “toxic assets” have come from: People unable to actually declare bankruptcy, but loans not officially in bankruptcy couldn’t be written off by lenders… so they’ve sat on the books for 5 years, rather than being written off each year.
I agree… it can and will happen again, as long as we keep trying to plug the dikes of the downside of Capitalism: sometimes people lose… and we have to allow that to happen… rather than save it up to happen at another time.
With all due respect, Ron Pisaturo, I think you don’t understand Derivatives. Derivatives are a POSITION, not a mortgage, or a group of mortgages. It is a form of Pari-Mutuel BETTING, where money is made on the relative value of what MAY happen; Buying and Selling a construct, a possibility, much like betting a friend which fly will launch first off the window-pane.
If all we had to worry about was dropping RE values, we wouldn’t be here talking about why those who didn’t even know the game was on (You?) are expected to cover the losses of the big players who climbed aboard, too late. Don’t buy anything you don’t understand, let alone risk money you can’t afford to lose, or someone else’s.
Congress is stealing the Lunch Money of the as yet unborn, to stay out of Jail, and keep some of their friends from getting killed.
just sayin’
AF
On a slow day at the Sahara, I was thinking about the table in front of me, the expanse of green felt where people had fun throwing money down the two holes at either end. (I was a Croupier). It occurred to me that it represented the fundament of Capitalism gone wrong. A busy game would have 20 players tossing chips and cash at the House, and perhaps a hundred people crunching them from behind to get a look at the action. Tell me how this picture is not like the Street or the Merc. When GS went down in ’99, “Products” were invented to satisfy the insatiable hunger of the Banks, (NOT the depositors), for action. With fistfuls of money (NOT their own), Bankers were insanely enveloped in the FEVER. In the ensuing decade, the action, backed up by NOTHING, slowed, and the Mountain of Debt of the crazy gamblers bagan to implode. It was as if the entire Nation was sucked into a vortex of quick-money madness, like a Super Bowl, or a crap game on 17th and Webster, in Oakland.
Grampa bet the FARM, and now we’re skint. Anyone disagree? Anyone care to put a finer point on this?
AF
Bill, your big picture is something that Adam Smith spotted and warned us of two centuries ago. Large, wealthy businesses will ALWAYS try to use the Government to shut down smaller competitors. What is good for any specific large firm is usually NOT good for America.
And the old saying that “You can’t cheat an honest man” still applies. Always did, always will.
MuscleDaddy, you are SOO right…
I once read that, back in 1907 or so, when a crisis like today’s was looming, J.P. Morgan was able to gather the heads of the banks involced, with their ledgers, and keep them in his library until the problem was solved. Nope, they just don’t make captains of industry like they used to.
And a big reason is that many of our “elites” have forgotten that things like reputation, integrity, and trust are a vital part of the moral “mortar” that holds the walls of society together against the constant attacks of whatever barbarians are out there. And today’s worst barbarians are those who are spreading that fog of corrosive ideas (“if it feels good do it,” “it’s never my fault,” there are no absolutes”)which has oozed out from the swamps of college lecture halls, faculty symposia, and scholarly meetings to blind so many. That’s SOO much more effective, and far less messy, than swords, flame, or axes.
And, without belaboring the point, the foundation of those walls has to be something beyond man – the God of the Bible, our creator and redeemer, the ultimate source of right and wrong.
I also think I read that some of the “creative” investment instruments that are choking the economy were designed by mathematicans or astrophysicists?!! Hell-ooo!!…string theory meets economics!!?? Is there something wrong with that picture?
When the Texas SuperCollider went Belly, there were hundreds, if not thousands, of unemployed math types looking for mischief. They found the Street, a match made in the ninth circle of Hell, IMO.
Liz, thank you for underpinning the true source of our “malady”, a loss of spirit and Spirit. Amen to your post.
“So, what is a house worth? Here’s my novel answer: unparalleled freedom for the owner once his abode is paid for.”
A: You never really own a home – you just lease it from the county. Just stop paying your property tax, you’ll find out.
Reminds me of my favorite beatitude: Blessed are they that have nothing, for they have nothing to lose.
-DD
I have some observations on Boards of Directors. I was invited on for a good non profit that kept elderly people at home as long as possible. I was not paid. My friend had started it, and his daughter and husband ran it. Took modest pay. It was very efficient until they retired. The new head had to take 3 times the pay, a problem, but not insurrmountable. But new board candidates started coming on. Not ordinary citizens as before, but professionals from legal and insurance back grounds. There were agenda’s at work. As all columns began to shrink, I was made to feel quite unwelcome in voicing concerns about why this was occuring. Annual meetings were called in resorts, and the work load ligthened tremendously. Much more time to golf. The Nursing Home lobby garnered far and away the lion’s share of grant monies. It was obvious what was going on, and I was unable to stop it. It went out of existence two years later. I had some hope with the Faith Based Charity concept, but the truth is, there is no end to the subterfuge. Experience shows things devolve from a movement, to a business, to a racket. Support your local charity on behalf of your community. Use your two eyes to observe whether to continue to do so. Demand the same of your elected officials. This is a duty, just as South Dakota sand bagged their towns to safety, including closing schools and using school kids. Best lesson they wll ever get. FEMA ordered them to leave, but stopped short of shooting them for not listening.
“A problem of morality”
Got it in one. This question was, as a matter of fact, posed before. And answered. People, _Atlas Shrugged_ has been in print for over fifty years. Everything that Ayn Rand wrote about in it is coming true. Why not open it and take a gander?
Your writings are, to me, logical and powerful expositions of the lack of honor and morality with a level of clariity I enjoy without a lecture.
I am 75 years of age and spent some 20 plus years in two major corporations in the United States. My wife, who is an American Citizen from Peruvian and I decided to move to Peru as soon as it was clear that we were about to elect a president who hates American and its citizens.
One of the corp’s I worked for was cooking the books by taking contracts as bookings while still in negotiations, bookings as shipments, and placing the contract on the receivables side of the ledger before equipment was installed or producing revenue.
When I discussed this situation with a neighbor who was an attorney and he grilled me seriously to review my actions as I was the head of marketing. We were at lunch in his office and he told me to go straight home, hire a good lawyer and never return to the corp’s premises. This is what I actually did and sent a letter to the corp’. This was the best an most financially rewarding position I had ever had and it turns, I was never able to earn the same level of income. I never regretted my decision as the corp’ was not an honorable firm.
The point of my comment is that I was raised with honor and loyalty as the movers in our lives. I have never failed in my personal honor or loyalty to my associates and family members.
I can assure you that I have worked since I was 10 years old and despite all the temptation$, I maintained my principles without compromise. Actually, a person of honor lives a life of decisions made simple and straight forward when made with honor.
Truly there is good vs evil and good is easier and thoroughly enjoyable.
Regards, Rocky1
Great work, well researched