September 19, 2008
A Taxpayer StickupBy Jim H. Ainsworth
Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers, and now AIG, a diversified international company primarily known for insurance. Recognize those names? Boxer Bob Fitzsimmons said, "The bigger they are, the harder they fall." How did these big guys fall? One analyst said that it might take years to figure that out. It shouldn't. Why should we be mad? Because we pay -- indirectly through our taxes and directly through losses in our own investments. Shareholders and bondholders stand to lose all or most of their investments.
This may not be financial Armageddon, but it is bad -- doubly so because it comes in an election year. Politicians are stumbling all over themselves trying to gain advantage from our misfortunes. Blaming the "failed policies of the Bush Administration" and comparing this economy to the Great Depression shows a profound ignorance of the situation and of history. Shouting for more regulations without understanding the ones we have is pandering. I have not heard one person or organization stand up and take any share of the blame. Not one. Some pundits tell us to forget fault; let's concentrate on fixing the problem. Wise advice maybe, but I hope we ignore it. If we don't recognize who or what is at fault, how can we hope to keep it from happening again?
I don't think many readers will stay with me down the arcane journey into the financial markets or the difference between investment and commercial banks, the Glass-Steagall Act or the Sarbanes-Oxley Act, so forgive me if I oversimplify. There is blame enough to go around, but that is at artful dodge. Here is a list of persons or systems I heard blamed in just one day (unscientific survey). George Bush (15), Deregulation (12), Wall Street (10), Predatory Lenders (9), Greed (8), CEO's (4), Brokers (1), Irresponsible Borrowers (1), Congress (1), Over-Regulation (1 maybe).
Deregulation, regulation and strangulation
Naming all the agencies that regulate the financial markets takes too long. Naming the laws and regs would be even worse. So I will just name a typical law: The Community Reinvestment Act. Never heard of it? Look in any bank lobby and you can see a framed copy. Passed during the Carter years, my banker described it to me back then this way. "The government is going to start requiring this bank to make loans that I do not consider in the best interests of our shareholders."
Some bankers retired or resigned rather than make bad loans. This law was beefed up during the Clinton administration with severe fines and penalties. Enter the sharks, followed by complex bundling of mortgages and the invention of derivatives. Good intentions, unintended consequences, disastrous results. Simply put, we have more laws and regs on the books than we can enforce. Second, we have bureaucrat regulators with no experience in financial markets trying to watch sharks who roam the financial waters daily.
My recommendation: cut back and simplify. Don't add more complexity, and please, no more bureaucracies. Impossible? Concentrate on these principles, "Don't lie, cheat or steal. When you violate this rule, penalties will be severe: think jail." Don't pass laws to advance personal or party political agendas. Fire bureaucrats who have never really worked in the financial industry and hire experienced people to enforce fewer, less complex laws that are based on common and good business sense. Give them authority, responsibility and accountability.
Wall Street, Brokers, CEO's, Greed, Predatory Lenders
Wall Street has become an expletive. Greed and excess are products of free enterprise, but also its worst enemies. Incompetence has run amuck. Usually, but not always, free markets exact their own punishment. Unfortunately, the heavy hand of government has crippled free markets with arcane, agenda-driven laws or rules.
The Grim Reaper has arrived. Let bad behavior be punished. Let the incompetents and greedy lose their money. Make them infamous. Fine them for violating regulations already on the books, send them to jail. We have a generation of professionals who abandoned sound principles in order to make more money. Short-term thinking takes over when bonuses are paid based on share prices and quarterly or monthly results (or in spite of results) instead of long-term performance. Even excellent executives can be caught in the middle of conditions they did not create, but a CEO, CFO, or director that does not know that a balance sheet has two sides, and who cannot recognize a risky loan or speculative security needs to be fired. Yet, they walked away with huge bonuses -- rewards for driving their companies into the ditch.
Lenders and brokers did aggressively pursue poor loans for short-term profits, but nobody held a gun to borrowers' heads. Whatever happened to personal responsibility? How did all these bad loans get made and why did nobody notice? Because loans were put into packaged securities and sold, dissolving the relationship between borrowers and lenders. In the old days, you would have to duck your head when you saw your banker if you were delinquent. He knew your name and where to find you. Not so today.
Presidents routinely get blamed for things that Congress does. This administration gets blamed for almost everything, even bad weather. I blame them for not shouting loudly enough and explaining the problem clearly enough. They raised the flag a few years ago, but failed to wave it.
So whom do I blame most? You guessed it: Congress. They need campaign coffers full, because they are in a never-ending run for re-election. For most of them, the next election and keeping their cushy job is priority one, not the American taxpayer. Look up which members took the most from Fannie and Freddie and the other organizations that failed. You'll find plenty of money spread around on both sides of the aisle. Many of the biggest recipients are playing the blame game loudest. Past CEO's of Fannie and Freddie have been political plum appointments -- places to get rich. These incompetents made hundreds of millions for flying their companies into mountains.
A congressman's answer to everything is to give himself more control: more agencies, more bureaucracies, more power, more money. Yet, the powerful chairman of the House Ways and Means Committee, the committee that writes tax law, does not know that his rental income must be reported on his tax return. The Chairman of the Senate Banking Committee does not know when he gets a sweetheart mortgage rate. Our longest-serving Senator is under indictment. Do we want these people running our biggest investment banks and insurance companies?
The lunatics have taken over the asylum. Do we really want foxes to continue guarding our hen houses? Our Founding Fathers served at personal and financial cost and sometimes, at their own peril. They could not envision a Congress that thrives on power and greed, with members who refuse to go home and live under the laws they created.
We need term limits. When is America going to say Enough?
Jim H. Ainsworth is a former CPA, CFP, CLU, Registered Investment Advisor, Licensed Securities Principal, and was twice named one of the most influential accountants in America by Accounting Today magazine. He welcomes comments at jimainsworth.com