Wednesday, October 8, 2008

At last, some common sense

I know I have been silent for quite a long time and much has happened since previous posts. I'll be frank, I lost my way a bit. I was indecisive about the bail-out program. While I had deep misgivings about it, especially the moral hazard (a phrase that is fast becoming cliche) of appearing to bail out miscreant bankers, and the burden it seemed to pose on tax payers. However, I also began to understand the sheer weight of the breakdown in the credit market and what that would pose in the way of consequences to all of us. Insofar as the anecdotes arising out of the maelstrom...such as AIG executives on a boondoggle running up largest bills for spa services, a full two weeks after their bailout....well, any of you would know what I think of that. I am glad the FBI is involved and I hope that those responsible will see the inside of a prison cell. Still, anger is much akin to fear. I was feeling both.

The N.Y. Times has broken a story today that I think may hold some potential for a great step in the right direction. To quote the story:

"Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials."
It goes on to note that the plan is in a preliminary form and it wasn't clear how it would work at this stage, but that it would likely be voluntary for those banks that avail themselves of it. This will bear watching. This is basically a recapitalization program on a huge scale. It also would have an immediate effect of a re approach to regulations in which the absence of has been a major element of enabling the massive credit crisis too begin with. Stephen Roach, the renowned Morgan Stanley economist and today the Chairman of Morgan Stanley Asia, was recently quoted as saying that failure to re-cpitalize the banks would mean that we wasted the bail out money. He has several other ideas too, including a much larger rate cut then the one announced today and coordinated throughout several nations. He states in a recent Financial Times article that
"In the end, this is not just a crisis of markets, financial institutions, risk management and regulators. It is a crisis of leadership. The authorities who gather in Washington this weekend should be locked in a room until they come up with a true global fix for this mother of all global crises. Incrementalism and failure are not an option."
Frankly, the idea that all those rows of regulations and laws on the law school book shelves have not existed for decades, and that "free markets" should be equal to an unfettered financial industry is a myth, and one that is particularly disingenuous. Regulations and controls are a cornerstone of civilization. The simple fact is that wholesale deregulation does not work, any more then does, say...ethnic cleansing.
We can throw money ineffectively at the problems in the name of defending free enterprise or we can use our brains, admit no perfect system ever existed or exists today, and the universe was no more ideally conceived by Adam Smith than Mao. American mores must shed the isolation and hubris that has crept into it's bloodstream via the twin catalysts of antipathy and eogism so carefully cultured by the new right policies of Reaganomics and it's hybridized spin off of the Bush era (just add large doses of fear mongering and greed).

If this crisis has awakened us from our slumber and given this thinking a sharp slap in the face, then we may be experiencing a cleansing, or at least a catharsis, that future historians may call a moment of salvation.

The plan roughly described in the NY Times article is a good step in the right direction. It is fascinating in the sense that I find it to be totally at odds with the Bush doctrine (if there is such a thing). It suggests to me that in these final days, government is no longer following, in all cases, Dubya's lead.
It is about time that we address the present and more importantly, our precious future.


Don said...

Hi Gary,
Good job on the latest blog posting. I whole-heartedly concur with you, except on one point. I learned on MSNBC this morning that the AIG trip was for their life insurance producers, independent agents who had won the trip as a perk for their production. Only 10 AIG executives attended the combination meeting/pleasure. This is no excuse for the fact that AIG borrowed $83 billion and is now seeking another nearly $38 billion, and yet didn't cancel their trip. Their producing agents possibly would have discontinued doing business with AIG. Too bad, by my reckoning. AIG should have to pay back the nearly $500,000 they spent on the trip immediately, if not sooner!

"Simplifried" said...

Hi Don,
I had already read the purpose behind the trip. Incidentally, I realize now that the way my comments read could be construed to think that I thought AIG guys should go to jail because of the trip. My bad. AIG guys should go to jail for not meeting their fiduciary responsibilities.
If I had been in a position to call the shot, I would have sent a letter to all of the sales force that had qualified for the trip and told them that in light of the recent urgencies at AIG, the need for Federal funds to stay afloat, etc etc, AIG is cancelling the trip and offering a cash commission bonus (or any number of ways to meet their obligation to the performers) instead.
Those producing agents that got their nose out of joint from this decision could leave if they wanted to, but you and I know the hard facts of abrupt changes in our daily lives and in business. To me, this would have been one of the easiest decisions to make on the part of AIG execs among a long list of hard decisions. Ask the 15% of people being laid off by Micron (just as an example) what they thought of the AIG saqles trip and the 23K or so spent on spa services. As a manager we have to know that sending the wrong signals to the various stakeholders (agents, employees, investors, customers, regulators, press, public opinion, etc) can be a huge mistake. These guys didn’t even have the savy to recognize that. It was, and still is, scandalous. However, it is also typical of the hubris that has become such a prominent fixture in American thinking. I include everyone from the impulse buyers at WalMart to the scoundrel executives with obscene pay:

Not convinced? Go google (news) three words: "AIG" "Executive" and "Pay"

Just read the list of headlines. Then tell me you think that AIG had a reason to go ahead with a luxuirous bonus trip for their sales performers. Or tell me that by deciding to go ahead served the higher need of the company, let alone the rest of the stakeholders. Of course it didn't. The resulting bad publicity will cause this company's name to join the infamy list. It is a complete P.R. rout. The most aggrieved victims are the employees and the shareholders. These guys should be tarred, feathered, and dangled from a wire outside their awaiting prison cells. They certainly deserve no more then your average Guantanomo inmate.

Just rea