Friday, September 19, 2008
Changing the Rules...
It seems government intervention in markets is the mode of the day. Between government bailouts for the good ole boys of Wall street to the independent moves of the Federal Reserve to flood the world with paper currency...it's looking like an early Christmas for private industry and finance thanks to a generous, if broke, "Uncle Sam".
Throughout the media and even comments on this blog, you see a variety of opinion on whether these bailouts are good, bad, necessary or unnecessary. In the midst of all these government "actions", you are seeing many investors caught in the middle of crazy market antics where the basic fundamentals or mechanisms of the marketplace are completely broken down. When the government announced over $200 BILLION in bailouts on the backs of the American taxpayers, the Dow Jones went up two days in a row, closing this horrific week almost 40 points higher than the start. How did THAT happen? Was it because suddenly these financial stocks looked good again based on borrowed or gifted government funds?
It seems we are living in a day where rules are made to be broken. Of course, one could argue that we have too many rules and micro managing of our markets and even our personal daily habits. Big Government has become the answer to all our social ills. If you are unemployed, government should be there to give you money while you are not working. If you get pregnant, government should be there to help raise your child or pay for an abortion. If you are a major investment banker on Wall Street, gambling it up better than any two bit Las Vegas junket gambler...your ultimate safety net is...the government bailout. Somehow we have gotten to the point where the losers can't fail in the marketplace, and the winners must contribute to cover the losses of those losers.
Now, if someone in the government came forward and explained to me how these bailouts would benefit and profit the taxpayers who are funding it, I might be a bit more enthusiastic about it. But the only explanations of all this I am hearing from these "leaders" is we are doing this to avoid catastrophe in our markets and to protect the "reputation" of our way of life. They probably see themselves as the protectors of democracy and free markets...both of which I suggest we have not had in true form for decades now. The problem is that historically very few debtors repay the government for these loans or bailouts. Our government gives billions of dollars each year to many countries throughout the world with no return payment expected. Sure, there are usually some strings attached based on propping up our democratic and economic agenda in their region of the world...but hey, any despot will do that for the right amount of payoff. Some who have historically been on our free payment list are Saddam Hussein, Manuel Noriega, and various African "puppet governments" we have propped up to "protect our interests". My point is, our government is quick to change the rules and throw our money around like there is no end to it. How long can this go on?
I spent 3+ years in the mid 80s as an SEC registered broker. I was cruising along nicely until "Black Monday" in October of 1987. Some called it a market "crash", some a "correction". Prior to that day, you had seen fortunes made on a few years of record market growth with the previous year seeing a 40%+ DOW gain in one year. Price/earnings ratios were at all time highs, but the euphoria of quick easy money kept the markets fired up until reality set in that October. That crash was actually started with other foreign exchanges first which by domino effect finally hit Wall Street and suddenly everyone woke up to the realities of their high PE ratios catching up to them and the sudden importance of balance sheets. This is now happening in reverse as you see the USA market ailments spreading to Europe and elsewhere.
As a result of the 87 "crash", the SEC was pressured to add tons of NEW regulations on top of the already huge weight of regulations we had to learn to be licensed brokers. Somewhere in all those rules was a reason for ANY loser in the market to sue the broker and whoever else they can for their losses. Even though all our materials and representations clearly stated the risks of stock investing, the "losers" still felt they were "victims" and law suits were flying right and left. After being in the “cross fire” for over 3 years, I decided I didn't want to live out a career representing investments or markets that I had no control or influence over. If your client made a killing, HE was a genius. If he lost a bundle even on paper, the broker was a dunce.
What the average consumer doesn't realize still is the cost to EVERYONE for covering HIS losses. Most lawsuits resulted in settlements, most broker/dealers are covered by insurance for these things...and you saw huge runs on these insurance funds...and attorneys were having a major feast on suing for their client's losses. These actions cost HUGE revenues for the financial and insurance industries...and of course in time those costs are passed back to the consumer in higher prices and/or premiums. There is no FREE MONEY in the world. It always comes out of SOMEBODY'S pocket...usually the consumers. Next time your neighbor is looking for a government "handout", remember it is coming out of YOUR pocket as a taxpayer. I am proud to say I have never taken a dime of unemployment or social services though there were a couple times I probably qualified. To me there has always been a stigma to waiting in unemployment lines or filling out myriads of papers to get government assistance. I know there is a place for it, but it should be LAST resort versus the first resort many citizens seem to make of the government. Yes, I have paid a lot in over the years to which I could claim entitlement…but I still think others need it more than I did at times…and thankfully I have always created other “outs”.
Typically, I am much more in favor of private insurance and finance companies to cover consumer risks. To that end, I am more in favor of private health care than public because government has never managed things better than private enterprise. Government should regulate in order to protect citizens from outright fraud or failure to complete contracts, but government should not be RUNNING business. To this end, I am very concerned that with these current bailouts government is now controlling a majority of our financial markets. While some argue how they couldn’t do any worse than the recent managers at the helm, I would suggest that we wait and see.
If we the taxpayers are now 80% owners of these companies through our funding and bailouts, we should have board members in those companies representing OUR interests. We should be focused on getting repaid...and as soon as possible getting OUT of these businesses we know nothing about. Let private entities come back in to buy us out...at a PROFIT. Unfortunately, our government has very rarely managed anything to a profit. They tend to squander every dollar that comes in, pay no heed to accountants, and are arrogant and elitist. And...they make and change the rules at will. Most of these rules provide protection in the short term, but little profitability in the long term.
I think we need to watch very carefully the people in government who are sponsoring and executing these bailouts. We should demand of them the same kind of reporting and controls that they place on private industry. I want to see periodic reports from the boards of directors on how our investments are coming and what kind of dividends we are seeing back in our collective coffers. And yes, I am in hopes that if we the taxpayers are going to be profitable by our government's ventures that we will see tax relief in the form of rebate checks from our dividends. Then and only then will I be satisfied with these changes in the rules. "Show me da money"!