Monday, July 28, 2008

How Did ‘Investor Satisfaction’ Ever Get to be a Taxpayer Priority?

Investor1 Who died and left the investors in charge of America’s future? When did manufacturers, airlines, investment banks, mom and pop shoe stores (if there are any left) and big-box retailers decide that business practice didn’t mean anything and business presentation was the whole ball game?

Oops, take mom and pop out of that equation. They are still providing the sweat equity that built America. It’s the rest of the business world that has given up sweat in favor of equity. Except for sweating out quarterly reports. Plenty of that goin' around, but even they no longer make sense; Google makes record profits and their stock drops; Merrill Chase doesn’t lose as much as they were expected to lose and their stock goes up.

Slowly, inevitably, unendingly over the past three or four decades, we have seen our American business model—the finest on the planet—hijacked by investors. Not customers or clients, but investors. They made themselves King of the Hill. If there’s an unwarranted Freudian slip toward that ‘hill’ being Capitol Hill, so be it. We deserve, under these maneuvered and contrived, massaged and outright lied-about circumstances to get sent to the back of the room until we better understand the free-market system that made us great.

Free markets are not those markets that abandon the security and welfare of their workers. Nor should they be free from all forms of government oversight, allowed to buy and sell Congress as suits their purpose. No section of the Bill of Rights empowers investors to pocket profits and off-load losses to the taxpayer. Short-term gains for corporations, manipulated by relieving themselves of that messy old habit of actually making things and, in place of that, dealing exclusively in the branding of things once was called cattle-rustling instead of merger.

Summerslarry Branding, without owning a herd, was a hanging offense in more sensible times.

A case in point is Larry Summers’ more-than-excellent assessment of the current rush to bail out Freddie Mac and Fannie Mae, so that investors will not lose confidence.

Unfinished Business at Freddie and Fannie--What the Government Should Do if the Housing Giants Can't Stand on Their Own (By Lawrence Summers, July 28, 2008)

Anyone who cares about the health of the U.S. economy should welcome the enactment of the Treasury's rescue plan for Fannie Mae and Freddie Mac, along with other measures to support the housing market. While there is room for argument about details, the risks to the financial system were too great to allow delay.

OK, Larry, maybe I agree with the premise, ‘cause you’re a guy with street-cred, at least on Wall Street. Go on.

No one should suppose, however, that the issue is satisfactorily resolved, even for the short term. Emergency legislation was necessary because market participants were unwilling to buy Fannie and Freddie's debt; investors doubted that the government-sponsored enterprises, or GSEs, were healthy enough to repay . . . If their (Fannie-Freddie) debt proves easier to place now, it is only because this guarantee has been strengthened, not because anything has changed at the GSEs.

This, to put it mildly, is a highly problematic posture for policy.

Now I know this won’t make a whole lot of ‘investors’ happy, but suppose—just suppose—we let them take the losses they so richly deserve and wring the bathwater out of Freddie and Fannie’s tub? Presumably, what we would be left with is the baby.

If this preferred alternative (see the entire article) is, as I fear, not realistic given the state of GSE finances, the government should use its new receivership power to protect taxpayers and the financial system. In the process, payments to stockholders, holders of preferred stock and probably subordinated debt holders would be wiped out, conserving cash for the benefit of taxpayers. The GSEs' borrowing costs would fall considerably, helping prospective homeowners. (underlining mine)

Wallstreetgamble I don’t know when the last time was that I heard anyone suggest that taxpayers ought to be protected and investors made responsible for their (essentially) gambling choices to win or lose at the great green table of Wall Street. Thank you, Larry Summers.

The likelihood of meltdown is great, no doubt about it. The pain of another ’29 style crash is even more painful to contemplate. But the alternative could be worse. The alternative may be to take a gamed system that has impoverished tens of millions for the enrichment of thousands—and extend it. The beast must be put down rather than encouraged to continually lower its head and turn on us.

Bearmarket America has become a vision of itself rather than an economic engine. We no longer make anything. Witness the overnight capitalization of Google to 25 times the value of General Motors, which has divisions on five continents, dealerships worldwide and a mix of product that ranges from Chevrolets to—ranges. Google (much as I love it and much as I value the direction American ingenuity allows in the creation of a Google) sells ads on the Internet.

Tigernike Brand has replaced product. Product can be made anywhere—mostly in places you wouldn’t want to have to find a hotel room for the night. Nike doesn’t make anything! Nike pays Tiger Woods a hundred million a year to mate his brand with their brand. The result is the birth of a super-brand, whose incidental made-by-someone-else shoe cost $4 to make, $40 to brand and that creates (for the investor) $40 in profit.

Where in that mix is a meaningful American job upon which an American man or woman can support a family?

There is none.

The meaningful job upon which a man or woman can support a family has been massaged out of the business formula as companies learned that making stuff was not nearly as nifty and profitable as branding stuff. That, my friend, is the answer to how company after company can lay off thousands (sometimes tens of thousands) of employees during a financial glitch. They are to a very large degree redundant and can be let go when the phones stop ringing—they don’t bloody make anything. When (and if) hired back, their benefits are gone, along with seniority and the wage they made at being let go.

Is this a great system, or what?

Now my premise, back three or four paragraphs, when I still thought I had a premise—was that the destruction of this glitz-based chimera of what business actually used to be, would bring us to our senses. The Harvard Business School (which we have largely to thank for a Pentagon that has lost its mission, a new paradigm for waging war, a currency in shambles, a series of ‘bubbles’ that periodically bring the nation to its knees, a quarterly-profit mentality that defines geed in place of purpose and—last but not least—parachutes its grads from disaster to disaster at a raise in pay) may finally be laid to rest as a business model.

Ozzieharriet What on earth would rise in its place? Old timey horses and carriages? The return of Ozzie and Harriet? Speaking in that vein to the narrower issue of Fannie and Freddie, Summers summarizes;

The stakes here are high. The choices made in the coming months will bear on the housing market, future taxpayer burdens, the credibility of U.S. financial authorities in times of crisis and the integrity of the political system. It is a time for decisive action.

The stakes are higher than that, Larry. Fred and Fannie are not the only credibility problems we face as a nation, as China becomes producer to America’s consumer and creditor to America’s debt. Congress seems unaware that it has a 14% approval rate—half that of the most unpopular president in memory. No Congress in history has stood at so low an approval rate, but these bozos have made themselves bullet-proof by gerrymandering districts and raking in the gobs of money from lobbyists that assure re-election.

Meanwhile, out in the real world, we are at the brink of tipping into fear and anarchy and Barack Obama was excoriated by the press for pointing out that obvious fact.

We need somehow to escape the bosom into which we have been flung—the clutches of investors. We must put resources once again into R&D in something other than the pharmaceutical industries and rebuild our infrastructure with jobs rather than selling it off to foreigners. Farming means more than absentee landlords raising crops and animals on lakes of sewage.

This country is too good to throw away and we are doing that as surely as God (or Safeway, who can tell the difference?) made little green apples.


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