Have We Created a New Economic Model?Gary Hamby
September 25, 2008 — 1,250 views
The absence of government oversight for the past 7 years plus the dangers of reckless deregulation of the financial companies struck hard at the American financial system this date, threatening it in the most grave manner since the Great Depression.
In a desperate move to stave-off international credit rating reductions the Federal Reserve initiated unparallel measures to inject massive liquidity into the markets this date. Banks will be able to turn in high risk CDS's (Credit Default Swaps) and speculative stocks for cash. What will the Federal Reserve do with such 'assets'? Presently, no one knows with certainty what will happen, but it is likely that the American taxpayer will be stuck with the bill.
Lehman Brothers (LEH), a one-hundred and fifty-eight year old venerable Wall Street firm has filed bankruptcy this morning. This action reflects the total absence of risk management and prudent judgment by its executives. Yet, these executives, if ousted, will receive millions in compensation due to the 'Golden Parachutes' common in corporate America. In essence they will have received these millions for having destroyed a long-term, reputable firm with world-wide relationships. Approximately six months ago, Lehman Brothers had discussions with multiple other financial entities and sources revealed that numerous offers were extended. However, the greed and hubris of these executives prevailed and all offers were rejected because the value was not enough for them and because they would have had to surrender executive controls. Instead, bankruptcy was forced on the firm this morning. This after a weekend filled with desperate attempts to find short-term financing and/or a government bail-out that would have allowed the company to continue its operations and be compliant with government regulations for securities firms. Sadly, it will be the millions of shareholders and the twenty-thousand plus employee who will suffer.
American International Group (AIG), the nation's largest insurance company with a trillion dollar balance sheet, is aggressively seeking a $40 billion bridge financing loan to stave off a credit rating downgrade that would trigger the need for larger amounts of capital to keep it compliant with varied regulations. This company epitomizes the problems with our financial system, as it has declined from over $90 per share to under $8 per share in the past year. Why such precipitous decline? In its simple form it is due to the high volume of mortgage loan write-offs. However, this severe decline reflects a more systemic failure intrinsic in the American financial system, i.e. unregulated companies without government oversight will take too much risk that always catches up with them.
The failure of Lehman Brothers and what appears to be the imminent failure of American International Group come on the back of government bail-out programs for Bear Sterns, Freddie Mac and Fannie Mae. Merrill-Lynch, the largest retail brokerage company in America has thwarted the same fate by a Bank of America buy-out over the weekend. Analysts are perplexed why Bank of America paid such a whopping premium (they purchased at $29 per share even though Merrill-Lynch closed Friday at $17.05 per share), especially in light of the continuous decline in recent weeks; and, what many believed had yet more downside. There are also many who believe that Bank of America will rue this day when the billions of bad loans on Merrill's balance sheet force large write-offs.
All of these failures reflect the inherent problems of allowing private companies to undertake any business activity it wishes without adequate controls in place to protect shareholders and employees. Controls that have been conspicuously absent since the Bush Administration took office in 2001. Who will ultimately bear the brunt of such greed and incompetence? Tragically, it will be the American taxpayer because this administration has engineered a new economic model - Capitalism with Socialized Risk!
About the Author
Gary Hamby has lived in 21 countries and traveled in more. Besides English, he speaks 4 other languages. He has been an executive for Fortune 500 companies, as well as an international conglomerate. He is an entrepreneur, having founded a PC manufacturing company that did over $5 million in sales in less than 18 months. He is a scratch golfer and an expert bridge player. Mr. Hamby and his wife of 18 years, rotate between St. Louis and Las Vegas.